Subject: [NEXTEL-1] 16-Oct-03 A.G. Edwards & Sons On Nextel

From: [email-masked]
Date: Sun, 19 Oct 2003 10:34:24 -0400

16-Oct-03 A.G. Edwards & Sons (Teets, Greg ) NXTL

NEXTEL DELIVERS A STRONG THIRD QUARTER - HOLD/SPECULATIVE

Market Cap ($mil.): $23,992          Est. Long-Term EPS CAGR:  12.0%
Dividend:           $0.00            Book Value Per Share:     $4.65
Yield:              0.0%             Price Objective:
Fiscal Year Ends Dec
EPS                  2002A   2003E   Prior   2004E    Prior
2005E   Prior
Qtr1                -$0.56   $0.20A          $0.39    $0.32
Qtr2                -$0.05   $0.27A          $0.46    $0.38
Qtr3                 $0.13   $0.32A  $0.30E  $0.48    $0.42
Qtr4                 $0.19   $0.38   $0.28   $0.42    $0.41
Year                -$0.17   $1.17   $1.07   $1.75    $1.53
P/E                          19.1X           12.8X

Nextel delivers yet another solid quarter of top and bottom line growth. Service
revenue in the September quarter increased 21.5% year over year and 9.0%
sequentially to $2.6 billion, compared to our $2.5 billion estimate.

Equipment revenue, which surprised us on the upside, increased 105.7% year over
year and 68.4% sequentially to $288 million, versus our $183 million estimate.
Combining Service and Equipment revenue, total revenue climbed to $2.9 billion, an
impressive 26.7% and 12.9% year over year and sequential improvement,
respectively.  Nextel's third quarter revenue beat our and the street estimate of
$2.6 billion.  Moving to the bottom line, Nextel grew net income to common
shareholders to $346 million from $128 million a year ago and $281 million in the
prior quarter.  Earnings per share at $0.32, compared to $0.13 a year ago and
$0.27 in the previous quarter, was in line with the street estimate and ahead of
our $0.30 estimate.

Nextel garners industry-leading margins.  Service gross profit improved 22.9% from
a year ago and 9.2% from the second quarter to $2.2 billion or 83.0% of service
revenue.  Nextel's gross margin has generally hovered at levels in the order of
80%, versus 70% for peers AT&T Wireless and Sprint PCS.  Significant improvement
in the cost of equipment lifted overall gross margin to 29.7% of sales, compared
to 27.1% in the same quarter last year and 28.3% in the second quarter.  Nextel's
OIBTDA (operating income before taxes, depreciation, and amortization) at $1.1
billion or 39.1% of sales, increased 28.6% year over year and remains one of the
best in the industry.  The industry average OIBTDA for the big six carriers in the
June quarter 2003 was 31.6%.

Key operating metrics remained strong. Nextel's key performance indicators remain
among the best in the industry.  Based on the favorable trends, we believe that
Nextel is well positioned to grow revenues about 20% versus 2002.

* A combination of lower churn and slightly better sequential gross additions
allowed Nextel to continue to impress on net additions.  The carrier added 646,000
new subscribers in the quarter, compared to 480,000 a year ago and 591,000 in the
prior quarter.  Nextel's unique product offering and ability to successfully cater
to business, government, and high-value individual customers once again enabled
the company to achieve impressive subscriber growth rates.

* Costs per gross addition (CPGA) held steady with year ago levels at $450 and
modestly improved from $460 in the second quarter.  Nextel continues to make
investments to improve its direct sales channels (retail stores, web sales, and
telesales), which carry significantly lower customer acquisition costs than the
indirect. Approximately 52% of gross additions came through direct channels in the
third quarter. Roughly 30% of gross additions came from the three distribution
channels mentioned above, which is an improvement from  22% a year ago.
Additionally, as government business becomes a larger portion of Nextel's
business, CPGA should improve due to lower acquisition costs associated with
add-on accounts.

* Average revenue per user (ARPU) at $71 was even with the third quarter a year
ago and improved from $69 in the second quarter.  Strong uptake of nationwide
direct connect, Nextel's continued focus on high quality customers, and increased
minutes of use allowed the company to once again maintain the highest ARPU in the
industry.

* Churn improved to 1.4% from 1.6% in the June quarter and remained at industry
leading levels.

Further balance sheet improvements.  Nextel paid down roughly $2.2 billion in debt
and mandatorily redeemable preferred stock during the third quarter in exchange
for $1.76 billion in cash and $584 million in common stock.  The company also
raised $2.0 billion in cash from the issuance of debt and an additional $500
million from the issuance of equity.  Proceeds will be used to redeem and
additional $1.3 billion in principal amount of senior notes in the fourth quarter
including $500 million of the $999 million in principal amount of Nextel 9.95%
Senior Serial Redeemable Discount Notes due 2008, $407 million in outstanding
aggregate amount of Nextel 9.75% Senior Serial Redeemable Discount Notes due 2007,
and the entire $271 million in outstanding aggregate principal amount of Nextel
12% Senior Redeemable Notes due 2008.

Notable progress at Boost Mobile.  Boost Mobile, Nextel's "lifestyle" brand
targeting youth in California and Nevada, added 102,000 new subscribers in the
third quarter, versus 80,000 in the second quarter and 40,000 in the first quarter
of 2003.  Though Nextel is not planning for geographic expansion of Boost Mobile
in 2004 nor is the brand a significant contributor to results, we feel the youth
market remains fertile and untapped. As adoption of wireless services by the U.S.
adult population tapers off, we feel carriers will be compelled to look to the
youth market as a growth opportunity in coming years.
2003 outlook revised upward.  Nextel provided updated guidance in its third
quarter earnings release.  The company now expects 2003 net subscriber additions
of 2.2 million, versus previous guidance of 1.9 million.  Nextel also guided for
2003 OIBTDA of $4.1 billion or more, versus previous guidance of $3.9 billion or
more and earnings per share of $1.15, versus previous guidance of at least $1.00.

Raising full year 2003 and 2004 estimates.  We are raising our 2003 revenue and
earnings per share estimates to $10.7 billion and $1.17 from $10.3 billion and
$1.07, respectively.  Our 2003 OIBTDA increases slightly to $4.1 billion compared
to our prior estimate of $4.0 billion.  Our 2004 earnings per share estimate moves
to $1.75 on revenue of $12.3 billion, versus our previous earnings per share
estimate of $1.53 on revenue of $11.6 billion.

Maintain our Hold/Speculative rating.  Nextel's improving cash flow, strong
performance metrics, and declining debt are testaments to its strong execution.

Looking at enterprise value per subscriber, NXTL shares trade at a deserved
premium in our view to AT&T Wireless and Sprint PCS, when one weighs Nextel's
higher ARPU and lower churn.  Using a discounted cash flow model and comparing
Nextel to its peer group using metrics such as enterprise value per subscriber,
enterprise value to revenue, and enterprise value to EBITDA, and allowing for
differences in future growth rates, capital expenditure levels, and management
risk, we feel shares are appropriately valued.

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