Subject: [NEXTEL-1] 17-Oct-03 Kaufman Bros On Nextel

From: [email-masked]
Date: Thu, 23 Oct 2003 08:34:52 -0400

17-Oct-03 Kaufman Bros (Rick Grubbs, CFA ) NXTL
NXTL: Reinstating Coverage; 3Q03 Results Review
REINSTATING COVERAGE;  3Q03 RESULTS REVIEW
Communications Services
NEXTEL COMMUNICATIONS, INC. (NXTL+  $22.36)        Rick Grubs, CFA
Rating: Reinstating With BUY
Price Target: Instating at $31                        SooAnn
Roberts, Associate

REINSTATING COVERAGE WITH BUY RATING AND $31 PRICE TARGET
3Q03 Results Review.  Nextel reported impressive 3Q03 results yesterday,
including:
-Churn of 1.4% versus 1.6% in 2Q03 (2.0% in 3Q02) and net adds of 646,000 versus
591,000 in 2Q03 (480,000 in 3Q02).

-ARPU increased to $71 QoQ from $69 in 2Q03; flat with 3Q02.
-Revenue growth of 13% QoQ and 27% YoY.
-EBITDA growth of 12% QoQ and 29% YoY.
-Net earnings growth of 23% QoQ and 170% YoY.
-Positive free cash flow for the fifth consecutive quarter while significantly
reducing debt.

Company Raising 2003 Guidance. Management announced new guidance for 2003,
including:
-Net adds of 2.2 million, up from previous guidance of 1.9+ million.
-EBITDA of $4.1 billion, up from $3.9 billion previously expected.
-EPS of at least $1.15; a 15% increase from prior EPS expectations.
-2003 free cash flow of $1 billion+.
-Another $1.3 billion in debt to be retired in 4Q03 in addition to the $2.2
billion retired in 3Q03.

Strong 3Q03 Performance. Nextel continued to impress us with 3Q03 results that
exceeded our estimates in a difficult economy. With some 35% of its net adds
coming from existing subscribers, Nextel raised its guidance for total subscribers
for full-year 2003 to approximately 2.2 million, implying a target for 4Q03 of
493,000 and higher than our previous estimate of 460,000. With 1,717,000 net new
subscribers year-to-date, 493,000 new subscribers in 4Q03 seems to be easily
reachable to make guidance, in our opinion.  Service revenue totaled $2.6 billion,
OIBDA (operating income before depreciation and amortization) was $1.13 billion,
and free cash flow was $410 million.  EPS (including a $132 million loss on the
early retirement of debt) was $0.32.

Nextel Continues to Improve Its Capital Structure. Nextel retired some $2.2
billion in debt and preferred stock during the quarter for $1.76 billion in cash
and the issuance of 30 million new shares at $19.47 per share.  Approximately 66%
of the reduction came from debt instruments and 34% was in mandatory redeemable
preferred stock. The company also announced additional debt retirements of $1.265
billion, which should occur in the 4Q03.  An additional $500 million in equity
capital was raised through a direct stock purchase plan and $2 billion was raised
through the sale of 7.375% senior serial redeemable notes due 2015.

Our Near-Term (and Longer-Term) Outlook. It seems that Nextel is paving the path
to customer retention, having a monthly churn of only 1.4% (the lowest for the
company since 1997 and considerably lower than the industry median of 2.4% (see
"Wireless Comp - Key Metrics" exhibit below) and success in targeting "youth
lifestyle" customers in California and Nevada with boost mobile offerings.
However, we cannot neglect the potential impact of WLNP (Wireless Local Number
Portability). Thus, we have a churn estimate of 1.9% for the next three quarters
with churn estimates tapering off slightly until it reaches a 1.5% average in
2005. Despite the jump in forecast churn from 3Q03 to 4Q03, which interprets to a
24% QoQ decrease in net adds, we see QoQ subs growth as sustainable at the 5.0%
level in the near term and thus expect a 5.5% QoQ increase in revenue to $3,045
million and 4Q03 EPS of $0.37.

Our 2004 revenue and EPS estimates are $13,069 million and $1.81, respectively.
Our 2005 revenue and EPS estimates are $13,730 million and $2.57 respectively.

We currently stand significantly higher than consensus (see "KBRO vs.  Consensus"
exhibit below) as we believe that Nextel will continue to be a leader in the
wireless industry, sustaining a higher average QoQ subs growth rate and thus
offsetting any potential negative impact from WLNP (see "Churn vs. Net Adds - The
Battle Continues" exhibit on the next page). We believe our estimates are
relatively conservative given our high forecast and will review the impact of WLNP
after 4Q03.

Investment Conclusion - Reinstating Coverage With BUY Recommendation and $31 Price
Target. We are instating a DCF-based price target of $31. We use an estimated WACC
of 11.5% and an estimated secular terminal growth rate of 4.7%.

The stock currently trades 6.9x 2004E EBITDA of $4.9 billion. We are reinstating
coverage of Nextel with a BUY recommendation given the fundamental and key
metrics, and see 38.6% upside given our $31 price target.

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