Subject: [NEXTEL-1] 16-Oct-03 Banc of America Securities On Nextel

From: [email-masked]
Date: Sat, 18 Oct 2003 12:52:17 -0400

16-Oct-03 Banc of America Securities (Barden, David W) NXTL AWE PCS
NXTL: Strong 3Q03 Results; Raising Estimates, Target to $20

Nextel Communications, Inc. (NXTL)
$22.36                               Neutral
Volatility:  High
12-Month Target:  $20.00
Total Return to Target:  (10.6%)

* Nextel reported strong third quarter results  that  exceeded  our  estimates.
Gross adds were up 1% sequentially and churn fell to a very low 1.4%  driving net
adds of 646,000.  This was a sequential uptick from 2Q at 591,000.  Total
subscribers at the end of 3Q03 were 12.3 million.

* ARPU grew to $71 per  month,  which  drove  stronger  than  expected  service
revenue of $2.6 billion. The sequential gain from $69 appears largely  driven by
overage, which should dip back down into 4Q.  Some gain also came from the
Nationwide Direct Connect launch, data and other.

* Equipment revenue jumped 68% to $288 million on  an  accounting  change.  The
company previously amortized handset sales and costs over subscriber life but now
books both up-front with negligible earnings impact.

* We are taking up 2003 and 2004 estimates.  Our 4Q03  estimate  is  rising  to
reflect 3Q03 performance.  A key change to our rising 2004 estimate is a more
generous assumption regarding  NOL  benefits  next  year  and  also  carrying
forward a more generous ARPU of $67 vs. $66 per month.

* Valuation and Target Price Analysis Our $20 price target is based on our  DCF
analysis and comparable multiple analysis.   Nextel  Communications currently
trades at 6x our 04 EBITDA estimate.

*Sector View Market Weight.  Strong 1H03 performance will continue
through 2H03 but emerging challenges into 04 will focus investors on investment
risk profiles as well as growth prospects

Company Data                    FYE Dec          2002 A    2003
E     2004 E
52-Week Range             $22-8 EPS
Secular Growth (EPS)        N/A Q1 (Mar)      ($0.77)     $0.21 A
$0.44
Market Cap.            $24.4 BB Q2 (Jun)         0.39      0.27
A     0.45
Avg. Daily Vol.      18,069,514 Q3 (Sep)         0.58      0.32
A     0.47
Debt/Cap. (9/03)          71.2% Q4 (Dec)         0.26
0.37       0.44
Est. Dividend/Yield  $0.00/NONE Fiscal Year     $0.55     $1.16
$1.80
Previous                  $1.23
$1.11
Index Data                      Calendar Yr     $0.55     $1.16
$1.80
DJIA                       9813 P/E              40.7
19.3       12.4
S&P 500                    1049 P/E/G             N/A
N/A        N/A

Raising Fourth Quarter and 2004 Estimates

For the fourth quarter, we have raised our net addition estimate  from  425,000 to
550,000 and increased our average revenue per unit (ARPU) by $2 from $67  to $69.
As a result, our fourth quarter EBITDA estimate increases  by  5.5%  from $1.08
billion to $1.13 billion.    These  changes,  plus  lower  cash  interest
expenses,  are  actually  offset,  however,  by  projected  non-recurring  debt
restructuring charges.  As a result, our  fourth  quarter  earnings  per  share
estimate  remains  unchanged  at  $0.37.    While  unchanged,  our  number  now
incorporates $0.05 of incremental debt restructuring charges.  Adding our  4Q03
estimate to year to date performance yields a  $1.16  estimate  for  the  year.

This new figure includes a total of $0.18 worth of debt  restructuring  changes in
2H03.  Stripping out the debt restructuring charges,  our  new  estimate  is $1.34
vs. our previous estimate of $1.23 for 2003, which did not include  these charges.

          Changes to BAS 4Q03 Estimates
New BAS Estimate  Old BAS
Estimate  Change
                                           4Q03E
4Q03E       4Q03
          Net Additions (000)               550
425       29.4%
          Total Subscribers (000)        12,890
12,544        2.8%
          Average Revenue Per Unit        $69.0
$67.0        3.0%
          EBITDA ($mm)                   $1,127
$1,076        4.7%
          Earnings Per Share             $0.37*
$0.37        0.0%
          *Includes $0.05 of projected debt restructuring charges.
          Source Company reports, Banc of America Securities LLC estimates.

The foremost change to our 2004 estimate relates to our tax assumptions for the
year.  This change accounts for $0.30 of the earnings  revision.    Normalizing
out this change, our estimate would have been $1.41.  Based on our most  recent
conversations with the company regarding their capacity to  use  Net  Operating
Losses (NOLs) to offset book tax payments next year, their confidence has risen
and we are reducing our tax expense estimate from $500 million to $180 million.
Our previous estimate was premised on the company deferring application of  the
NOLs as an offset to tax expense and realizing the  benefits  in  2005  due  to
certain accounting thresholds that have apparently been met.

The balance of the revision to our estimates comes from rolling
forward a  more generous ARPU of $67 versus our previous estimate of just under
$66.   We  make this adjustment in light of the company's strong 3Q03 experience
of    $71  and the potential positive effect of Nationwide Direct Connect.  This
change  added $0.14 to our estimate.  A higher ending subscriber forecast
contributes as well as a 10 basis point reduction in churn for 2004 to 1.9%.

          Changes to 2004 Estimates
New BAS Estimate  Old BAS
Estimate  Change
                                           2004E
2004E       2004
          Average Revenue Per Unit          $67
$66        2.0%
          EBITDA                           4,765
4,397       8.4%
          Earnings Per Share               $1.80
$1.11      62.1%
          Source Company reports, Banc of America Securities LLC estimates.

Raising Target to $20

We have increased our target price on Nextel to $20 from $19 on  the  heels  of
the company's strong 3Q03 results and the updates to  our  model  as  discussed
above.  Nextel is a  strong  performer  in  the  sector  with  reasonably  high
visibility on continued strength into 2004.    The  company  does  trade  at  a
premium to its peers but generates premium operating metrics  to  back  it  up.

Our view of Nextel is that while the company continues  to  perform  well,  its
ability to widen the gap between itself and its peers sustainably over time  is
limited.  This does not rule out the possibility the company will maintain  its
lead over competitors in the near-term.  The  biggest  challenge,  as  yet  not
realized, will emerge as competitors bring  new  service  options  to  Nextel's
government and business subcriber base.  The biggest impact is not likely to be
customer disaffection, but business and government buyers using competition  as a
foil to renegotiate contract pricing for Nextel services.  As a result, while
Nextel continues to perform well, the gap between itself and others  is  likely
narrow and with this, its trading valuation.
Discounted Cash Flow

Our DCF analysis for Nextel Communications entails a 10-year  cash
flow  model extending to 2012. Our discount rate is based on the current  10-
year  Treasury bond yield, BAS economists' inflation  expectations  and  what  we
consider  a conservative quantification of market risk (beta) of 2.0.  The
result  of  our calculation is a mean weighted average cost of capital (WACC) of
approximately 10%. The company maintains  a  strong  liquidity  position,  ending
the  third quarter with $3.6 billion in cash (up from $2.5 in 2Q03) and an
additional $1.2 billion in available credit.

DCF Valuation Sensitivity
Discount rate
                      8.3%   9.3%  10.3%  11.3%   12.3%   Spread
               4.0    16.1   17.7   16.3   14.9    13.7       2.5
               5.0    21.9   20.1   18.4   16.9    15.5       6.4
Terminal (X)   6.0    24.5   22.4   20.6   18.8    17.3       7.2
               7.0    27.1   24.8   22.7   20.8    19.1       8.0
               8.0    29.6   27.1   24.9   22.8    20.9       8.8
             Spread   13.5    9.4    8.6    7.8     7.2      16.0
Source Company reports, Banc of America Securities LLC estimates.

Comparable Multiples

Based on 2004 estimated EBITDA, Nextel Communications is currently trading at a
multiple of 6.0x, versus  AT&T  Wireless  and  Sprint  PCS  at  5.5x  and  5.9x
respectively.  Nextel currently trades in line to a premium with  its  industry
peers on a EV/EBITDA basis and is currently estimated to grow EBITDA at  as
3-year CAGR (2003E-2006E) of 9% versus  8%  and  10%  for  Sprint  PCS  and  AT&T
Wireless, respectively.  While the current multiple appears to be  in  line  to
slightly above its peers, the company does generate superior  free  cash  flow.

At the same time, we would note that the company  faces  some  company-specific
competitive issues looking into 2004 that  temper  our  investment  rating  and
drive decelerating growth going forward which brings into question whether  the
company can sustain its relative valuation position within  the  group  despite
posting strong fundamental performance.

Financial Performance

Nextel reported strong 3Q03 total  revenue  of  $2.9  billion,  well  ahead  of
estimates.  Revenue grew 12.9% sequentially  and  26.7%  year  over  year.  The
company reported service revenue of $2.6 billion versus our  estimate  of  $2.4
billion, growth of 10.5% sequentially and 21.5% year  over  year.  The  company
reported equipment revenue  of  $288  million,  versus  our  estimate  of  $150
million, growth of 68.4% sequentially and 105.7% year over  year.    (Equipment
revenue benefited from a change in accounting policy effective June  30,  2003.

Nextel now books revenue from handset sales and the related costs at  the  time of
the sale, whereas these items were previously recognized on a  straight-line basis
over the estimated customer relationship period of 3.5 years.) Nextel reported
consolidated EBITDA of $1.1 billion, in line with our estimate, growing 12.5%
sequentially and 28.6% year over year. Cost of services increased 8.1%
sequentially and 15.1% year over year to $441 million, or 15.3% of revenue (from
16.0% in 2Q03 and 16.8% in 3Q02), above our  estimate  of  $433  million.

Equipment costs increased 31.7% sequentially and 76.6% year over year  to  $415
million, or 14.4% of revenue (from 12.3% in 2Q03 and 10.3% in 3Q02), above  our
estimate of $284  million,  but  again  due  to  primarily  to  the
change  in accounting  policies.    General  and  administrative  costs
increased   9.1% sequentially and 13.2% year over year to $420  million,  or
14.5%  of  revenue (from 15.1% in 2Q03 and 16.3% in 3Q02), above our  estimate
of  $411  million.
Marketing costs increased 8.6% sequentially and 17.0% year over  year  to  $482
million, or 16.7% of revenue (from 17.4% in 2Q03 and 18.1% in 3Q02), above  our
estimate of $417 million. In total, Nextel reported a  3Q03  EBITDA  margin  of
39.1%, versus our estimate of 40.9%, 39.3% in 3Q02 and 38.5% in 3Q02.

Nextel reported consolidated EBIT of $700 million versus our estimate  of  $630
million, growth of 20.3% sequentially and 50.2% year  over  year.  Depreciation
and amortization expense increased to $429 million, from $422 million in  2Q03.
In total, Nextel reported an EBIT margin  of  24.2%,  versus  our  estimate  of
24.1%, 22.8% in 2Q03 and 20.4% in 3Q02.
Nextel reported a normalized 3Q03 EPS of $0.46 versus our estimate of $0.37 and
the Street consensus of $0.32.  Nextel's 3Q03 EPS is normalized  for  the  $132
million loss on early retirement of debt.  Nextel reported EPS of $0.27 in 2Q03
and $0.58 in 3Q02.

Operational Performance

Nextel reported net adds of 646,000 versus our estimate of 425,000,  growth  of
9.3% sequentially and 34.6% year over year.  Nextel reported 1.15 million gross
adds versus our estimate of 1.1 million.  Monthly churn came in at 1.4%  versus
our estimate of 1.8%, yielding a total subscriber base of 12.3  million  versus
our estimate of 12.1 million.  ARPU came in  at  $71  versus  our  estimate  of
$68.00, an increase from $68.78 in 2Q03 but a decrease  from  $72.17  in  3Q02.
Nextel attributed the increase in ARPU during the quarter to a continued  focus on
high value subscribers, minutes of use growth,  increased  overage  minutes,
increased data and SMS revenues, and  a  strong  uptake  of  nationwide  Direct
Connect (1/3 of Nextel's customer base used Nationwide Direct Connect at  least
once in the last 60 days and 90% of the base use local  direct  connect).    We
believe overage was key driver of the increase.

Debt Reduction

There were no new material debt  restructuring  announcements  at  the  result.
Nextel took a $132 million charge in the quarter  ($0.13  per  share)  for  the
retirement of $2.2 billion  debt  in  the  quarter  that  had  been  previously
announced.  The company has announced the planned redemption of  $1.27  billion of
debt in three tranches through November 1st.

*$500m of 9.95% notes at 104.975 on 10/24/03 (leaving $499m of this tranche)

*$497m of 9.75% notes at 102.4375 on 10/31/03 (entire tranche)

*$268mm of 12% notes at 106 on 11/1/03 (entire tranche)

We estimate the total premium cost of redeeming this debt will be $53  million,
which we have built into our 4Q03 earnings estimates and which the  company  is
baking into their guidance.  The annual interest  payment  of  the
soon-to-be-redeemed debt is $130 million.  Assuming a  direct  substitution  of
the  this redeemed debt with the recently raised $2 billion in 7.375% notes, the
company nets a $36 million annual benefit from the exercise or about $0.03  per
share.
Adding back in expenses related to debt restructuring, we estimate  NXTL's  P/E is
approximately 17 implying a $0.50 benefit to stockholders for the move.  The big
gains that NXTL has generated in the past for  equity  holders  related  to debt
restructuring have been related to the company's repurchase of debt  at  a
discount.  To the  company's  credit,  this  opportunity  has  passed  and  the
company's debt in the marketplace no longer trades at a discount.  The  company
now is retiring debt to take advantage of lower  credit  spreads  and  interest
rates but generating smaller, more incremental gains than in the past.

Capital Expenditures

Nextel under spent our estimate on  capex  for  the  quarter  at
$403  million against our $550 million.  The company clearly has some spending
priorities and it may be that the delayed implementation of the 61 vocoder and
related capital expenses may be why we overshot this quarter and is a reason  to
believe  next quarter will play some catch-up.  The company has periodically
reiterated  its spending plan for '$1.8 billion or less' and  the  company's  $300

million  in spend in 1Q03 and $400 million in 2Q03 led us to estimate that
3Q03  and  4Q03 would rise to around the $500+ million level.  The company has not

changed  its official capex guidance but will need a substantial jump in spending
in  4Q  to meet our current $1.8 billion estimate.  Coverage and  quality
remain  on  the company's agenda heading into WNP as well and therefore we are
raising our 4Q03 capex number from $550 million to $600 million  bringing  full
year  capex  to $1.71 billion.

Update on Boost

The company this past quarter added  102,000  net  Boost
subscribers  bringing total subscribers after a full year in these trial markets
to
245,000.  A  year ago, Nextel's management announced that they had begun  testing
of
the  Boost service in the California and Nevada markets in the  first  week
of  September followed by and advertising launch mid-month.  The  company  did
not  directly address the large step up in subscribers this quarter (which are
not  included in reported net adds for the quarter) and whether it was organic or
encouraged as part of a larger effort to develop Boost at the margin.  The
company will be deploying a new pre-paid Sim card based product and introducing a
lower-priced handset.  Both these initiatives point to Nextel investing more
energy  in  the brand but also may signal the company is hunting for the right
mix
of  price- points and handsets.

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