Subject: [NEXTEL-1] 17-Oct-03 Lehman Brothers On Nextel

From: [email-masked]
Date: Sat, 18 Oct 2003 12:38:30 -0400

17-Oct-03 Lehman Brothers (Bath, Blake  NXTL AWE BLS Nextel Communications: The
Power of a Well-Run Co. on a Roll PRICE: (USD 22.36)
EPS        (FY Dec)

2002            2003                    2004              %
Change
Actual   Old     New   St. Est   Old     New   St. Est
2003    2004
1Q   (0.35)  0.20A   0.20A   0.20A     NA      NA    0.32E
157      NA
2Q   (0.05)  0.27A   0.27A   0.27A     NA      NA    0.37E
640      NA
3Q    0.14   0.32E   0.32E   0.32E     NA      NA    0.39E
129      NA
4Q    0.21   0.36E   0.39E   0.31E     NA      NA    0.38E
86      NA

Year  (0.05)  1.15E   1.17E   1.10E   1.65E   1.66E   1.47E
2,440     42

P/E                   19.1                    13.5
Market Data                             Financial Summary

Market Cap                    25763.2M   Revenue
FY03                 $9,816M
Shares Outstanding (Mi          1152.2   Five-Year EPS
CAGR               12%
Float                              818   Return on
Equity                 11%
Dividend Yield                      NA   Current
BVPS                   $4.52
Convertible                        Yes   Debt To
Capital                  25%
52 wk Range               21.78 - 7.25

Stock Rating:              Target:
New: 1-Overweight          New: 28.00
Old: 1-Overweight          Old: 28.00
Sector View:2-Neutral

INVESTMENT CONCLUSION :
*  Nextel reported a strong 3Q03, well above expectations. Given increasing
estimates and momentum, we expect Nextel to continue to perform well in 4Q03 and
2004. We reiterate our 1-OW rating and $28 price target on Lehman 10 Uncommon
Value Nextel.

SUMMARY :
*  For 3Q03, Nextel added 646K net adds vs. our 625K est., due to churn of 1.4%
vs. our 1.6% est. ARPU of $72 was also stronger than expected, driving higher revs
of $2.6B and 
EBITDA of $1.1B.
*  Nextel also raised guidance for 2003 to levels in line or exceeding our prior
estimates. While the co. has not given guidance for 2004, we expect recent
momentum to continue, and believe our outlook for EBITDA of $4.7B and EPS of $1.66
is conservative.
*  On an `04 EBITDA basis, NXTL trades at 6.8x vs. AWE and PCS at
5.4x. On an
`04 EPS basis, NXTL trades at 13.5x our $1.66 est. (19.1x normalized
EPS of
$1.17), still cheap relative to its growth outlook.

NEXTEL CONTINUES STRING OF OUTPERFORMANCE - REITERATE 1-OVERWEIGHT
Yesterday, Nextel Communications reported extremely strong 3Q03 results, which
even exceeded our recently raised estimates.  In addition, Nextel significantly
raised guidance for the full year 2003.  While we had always expected Nextel, and
the industry in general, to post a strong quarter, we see the degree of Nextel`s
outperformance as a strong start to the wireless carrier reporting season.  With
its differentiated product offering and strong execution, we continue to view
Nextel as the best positioned pure play wireless operator and reiterate our
1-Overweight rating and $28 price target on Lehman 10 Uncommon Value Nextel.

For the quarter, primarily due to extremely low churn of 1.4%, Nextel added
646,000 new subscribers, exclusive of a further 102,000 added to its Boost Mobile
prepay product, ahead of our recently raised 625,000 estimate.  Average revenue
per user (ARPU) of $72 was higher than our $70 estimate, resulting in service
revenue of $2.6 billion vs. our $2.5 billion estimate.

Nextel reported $1.13 billion in EBITDA vs. our $1.05 billion estimate, as margins
expanded to an industry leading 43%.
Given such strong results and confidence that such trends will
continue, Nextel management raised guidance for the full year 2003

*  Net adds raised 300k, or 16%, from 1.9 million to 2.2 million (Lehman estimate:
2.3 million)

*  EBITDA guidance raised from $3.9 billion to $4.1 billion (Lehman estimate:
$4.2 billion)
*  EPS raised from $1.00 to $1.15 (Lehman estimate: $1.17)
*  Capex unchanged at $1.8B (Lehman estimate: $1.8B)
*  Free cash flow raised 67% from $600mm to $1.0B (Lehman estimate:
$1.0B)

We consider company guidance to be rather conservative and foresee potential
upside to guidance/estimates as management cited strong momentum entering 4Q03. 
We think shares of Nextel are attractive and reiterate our 1-Overweight rating. 
Nextel trades at 13.5x our 2004 EPS estimate of $1.66 (19.1x normalized,
fully-taxed EPS of $1.17).  As we stated in our note from October 15, in which we
raised our Nextel estimates, after yesterday`s announcement of such strong
results, we expect consensus estimates for Nextel to increase significantly and
for valuation to improve even further.

3QO3 RESULTS - LOW CHURN, HIGHER ARPU DRIVE STRONG RESULTS

Nextel reported a very strong third quarter yesterday morning.  The company added
a full 646,000 net new subscribers, exclusive of a further 102,000 added to its
Boost Mobile prepay product, even exceeding our recently raised expectation of
625,000 net additions as well as consensus.  The net addition beat was driven by a
better than expected churn level of just 1.4%, lower than our 1.6% estimate and
the company`s lowest churn level since 1997.
Nextel`s 1.4% churn was even 20 bps below its strong 1.6% level reported in 2Q03. 
We attribute such subscriber retention success to Nextel`s differentiated product
offering (even in the face of Verizon Wireless` recent competing PTT launch),
increased customer satisfaction from the company`s `touch point` strategy and the
network effect of its embedded customer base.

Nextel also reported ARPU of $72 (calculated using total service revenue and
reported subscribers, excluding Boost), which exceeded our $70 estimate and the
$70 posted in 2Q03 and $68 in 1Q03.  Last quarter, we noted Nextel`s $2 sequential
uptick in ARPU was primarily the result of increased subscriber usage, as
demonstrated by monthly MOU of 720 per subscriber versus 650 in 1Q03.  This
quarter, however, we note the sequential ARPU increase is still $2 while per
subscriber MOU increased only slightly to 740.  Thus, assuming Nextel`s
incremental data results were only marginal, we point to the adoption of Nextel`s
new Nationwide Direct Connect as the primary driver of the improved monthly
revenue result.  On the call, Nextel management indicated that 1/3rd of
subscribers have used Nationwide Direct Connect in the last 60 days.  As awareness
increases, we expect this product`s penetration to increase as well, buoying ARPU
with its $10 per month or $0.10 per minute revenue contribution.  We expect the
other national wireless carriers to, once again, post ARPU figures at meaningful
discounts to Nextel, evidence of Nextel`s continued differentiation.

On the expense side, Nextel continues to perform well.  3Q03 EBITDA margin came in
at 43%, above our 42% estimate and the 42% posted in 2Q03, and likely to be
industry-leading once again.  As a result, EBITDA was $1,129 million, $79 million
above our $1,050 million estimate.  We note that the 134 bps sequential margin
increase was largely the result of lower handset subsidies, with slight scaling in
the expense areas of cost of service and marketing and selling.  Nextel`s expense
management continues to be prudent and its focus on enhancing profitability
remains strong, as evidenced by its continued robust margin levels.  We also note
the company`s continued collection and customer screening efforts which resulted
in bad debt expense at just 70 bps (as a % of service revenue) down from 100 bps
in 2Q03 and 240 bps in 1Q03.

We calculate the company`s current allowance on accounts receivable at just 7% (as
a % of gross A/R) from 10.5% at 12/31/02, which when combined with management`s
comments on the call that the company is actually fully reserved for accounts
greater than 60 days past due, indicates to us that bad debt levels will continue
to be very low.

FIGURE 01: NEXTEL COMMUNICATIONS - 3Q03 VARIANCE ANALYSIS
Nextel reported EPS for the quarter of $0.32, in line with our estimate.  We note
the EPS result included $132 million, or $0.13 per share, of charges related to
Nextel`s approximate $2.2 billion debt retirement in the quarter.
Excluding the impact of the debt retirement, Nextel reported $0.45 in EPS on a
diluted basis.

Nextel invested just $403 million in capex in the quarter, significantly below our
estimate of $570 million.  Aided by less than expected capex spend and better
operating results, Nextel reported 3Q03 free cash flow of $410 million.

FIGURE 02: NEXTEL COMMUNICATIONS - ESTIMATED VERSUS ACTUAL 3Q03 RESULTS 2003
OUTLOOK - 4Q03 ESTIMATES RAISED ON IMPROVED OUTLOOK In addition to reporting very
strong 3Q03 results, Nextel significantly raised its guidance for 2003, putting
its expectations at or above our prior estimates.  Given stronger than expected
quarterly performance and momentum, we have increased accordingly our 2003
estimates.  Despite yet another round of estimate increases, we continue to think
that expectations for Nextel are achievable and that upside exists to current
estimates.

We now estimate 2.3 million net additions for 2003, up from 2.1 million previously
and compared to guidance of 2.2 million.  For 4Q03, we are maintaining our 550,000
net add estimate even though such an estimate indicates a sequential decline from
3Q03 net adds of 646,000.  Nextel has never been as exposed to the retail holiday
selling season as the other more consumer-focused wireless carriers, so we think
it appropriate to have slightly more conservative growth expectations for 4Q03. 
Despite such conservatism, our estimate remains roughly 100,000 net adds ahead of
company guidance.

Given strong performance through 2003, we have increased slightly our 2003 ARPU
estimate to $70 from $69.  When combined with increased subscriber growth
estimates, the increase in ARPU results in service revenue of $9.8 billion versus
our prior estimate of $9.7 billion.  We also think that Nextel`s strong
profitability can continue into 4Q03 and have raised our full year EBITDA estimate
to $4.2 billion from $4.0 billion and compared to guidance of $4.1 billion.  The
improvement in profitability flows through to the bottom line, resulting in a
slight increase in our 2003 EPS estimate to $1.17 from $1.15.

Nextel continues to opportunistically retire debt and expects to retire an
additional $1.3 billion in debt in 4Q03.  Based on Nextel`s disclosure, we
estimate the announced retirements will have a $0.04 to $0.05 negative impact on
EPS in 4Q03.  Given the announcement late yesterday that Nextel plans to issue
another $500 million in debt, we would expect that additional refinancing may
occur.

We note also, that the company reiterated full year 2003 capex guidance of $1.8
billion, in line with our current estimate.  Thus, given its year-to-date spend of
just $1,137 million and consistent with management comments on the call, we expect
Nextel to spend on the order of 35% to 40% of its full year capex budget in 4Q03
and have raised our 4Q03 estimate to $675 million from $520 million.  In 4Q03,
Nextel also plans to pay $144 million to MCI as consideration for MMDS spectrum
licenses.  The combination of back-end loaded capex and the spectrum acquisition
result in our forecast of free cash flow of ($13 million) in 4Q03.  For 2003, we
estimate $1.0 billion in free cash flow, up from our prior estimate of $820
million and in line with guidance.

FORECASTING THE YEAR AHEAD:

OPERATIONAL EXCELLENCE + RISING ESTIMATES+RESOLUTION OF OVERHANGS = OUTPERFORMANCE
While the company has not provided 2004 guidance, we expect that the recent
success will continue into next year.  We expect subscriber growth to be 2.3
million, on par with our expectations for 2003 and well above recent consensus,
which we estimate at 1.5 - 1.7 million.  We estimate ARPU of $68, representing a
$2 decline from our $70 2003 estimate, which results in service revenue of $11.4
billion.  In anticipation of continued strong subscriber growth, we estimate flat
margins of 42%, resulting in $4.7 billion of EBITDA.  We estimate EPS of $1.66, or
$1.17 on a fully-taxed normalized basis.  At the moment, Street estimates are
spread over a wide range and we would expect over the coming quarter that both
2003 and 2004 consensus estimates will increase substantially.

Aside from the continuation of strong operating performance, during 2004, we
expect the spectrum swap proposal and Boost Mobile to be in focus.  Management
have expressed encouragement with the progress being made at the FCC on the
Consensus Plan spectrum swap proposal and have indicated that a decision may be
reached by the end of 2003 or in early 2004.  Chief Technology Officer Barry West
stated that there was a `growing agreement` at the FCC that a retune of the 800
MHz band was necessary and that the Consensus Plan remains the only plan that is
truly a viable solution to the interference problems.  While we believe acceptance
of the Consensus Plan would be an important positive for Nextel and have accounted
for the $850 million retuning investment in our model, we believe Nextel is
unlikely to get everything it has requested in the proposal.  Nevertheless, we
think that Nextel has sufficient operating and financial flexibility to acquire
and utilize other spectrum should the plan not be accepted by the Commission.

Additionally, Nextel continues to experience success with its Boost Mobile trial. 
Even though it is only offering Boost service in California and Nevada, it added
102,000 net additions in 3Q03.  While accounting for only a small portion of the
company`s subscriber base, we expect it to become an increasing point of focus and
a growth engine for Nextel.  While Boost caters to the youth market, which
generally has poorer demographics than Nextel`s core customers, we think it is a
good sign that Nextel has been able to consistently increase its EBITDA margin
while entering into this new market.
Finally, we believe Nextel`s valuation continues to be depressed by concerns about
push-to-talk wannabes infringing on its core market.  As we have said repeatedly,
and as the 3Q03 results underscore emphatically, we believe the threat of PTT
competition is vastly overstated given Nextel`s network effect, superior product
capability, and differentiated marketing and customer care approaches.  It is our
view that as Nextel continues to post strong results, even with a greater number
of PTT competitors, this concern will fade and NXTL`s multiple will rise.

VALUATION METHODOLOGY
Our DCF model yields an end of 2004 private market enterprise value for Nextel of
$42.2 billion.  Subtracting $6.7 billion of year-end 2004 net debt gives an
estimated private market equity value of $35.5 billion.

Applying a 10% private-to-public market discount gives an end of 2004 public
market value of $31.9 billion.

To this we add $905 million for Nextel`s 32% investment in Nextel Partners and
$542 million for its investment in Nextel International.  With 1,210 million fully
diluted shares, our price target is $28.

Nextel trades at 6.8x 2004 EBITDA, versus AT&T Wireless and Sprint PCS at 5.4x. 
One of the few wireless companies to have positive earnings per share, Nextel
trades at 13.5x our 2004 estimate of $1.66 (19.1x normalized EPS of $1.17).

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