Subject: [NEXTEL-1] 17-Oct-03 Morgan Stanley- NEXTEL: ANOTHER STRONG QUARTER BUT 2004 CLOUDS REMAIN

From: [email-masked]
Date: Sat, 18 Oct 2003 12:26:49 -0400

17-Oct-03 Morgan Stanley (Flannery, Simon +1) NXTL
NEXTEL: ANOTHER STRONG QUARTER BUT 2004 CLOUDS REMAIN
October 17, 2003
Analysis of Sales/Earnings
Nextel
(NASDAQ: NXTL, Bloomberg: NXTL US)
Another Strong Quarter But 2004 Clouds Remain

-AS EXPECTED, NEXTEL REPORTED STRONG RESULTS Net additions and churn were better
than expected, although gross additions were below our estimate.  Revenue and
EBITDA both came in above expectations and the EBITDA margin climbed to 43.4%
versus our estimate of
42.5%.  Other good news included traction with nationwide Direct Connect and
prepaid.
-MULTIPLE LEVERS PULLED: CAN FOURTH QUARTER RESULTS TOP THIS?
Churn and bad debt were lower than expected, but the company may be experiencing
pre-WLNP benefits that will soon end.  Capex was also lower than expected but
should increase significantly in 4Q03.  CCPU rose to $24 and may continue to climb
in a number portability world and as the new ad campaigns kick off.  Lastly, ARPU
was strong but normally falls back during the fourth quarter.
-LONGER-TERM CONCERNS REMAIN: MAINTAIN EQUAL-WEIGHT-V RATING Our 2004 concerns
include a gradual increase in push-to-talk competition, the need to announce a 3G
plan once the FCC finally makes a spectrum swap decision, a step up in churn due
to WLNP, the possible need to announce that stock options will be expensed, and
valuation, with the stock up 85% year to date.
-MAINTAINING CAUTIOUS VIEW ON TELECOM SERVICES Our industry view reflects wireline
and wireless telecom services.  We favor wireless over wireline, local over LD and
rural over metro.  We believe that negative industry dynamics will continue and
that the industry will under perform the broader market.
STOCK RATING                  EQUAL-WEIGHT--V
Price (October 15, 2003)               $22.12
Price Target                              $19
52-Week Range                   $22.23 - 8.71
Stock ratings are relative to the analyst's industry (or industry team's) coverage
universe.
GICS SECTOR                  TELECOM SERVICES
US Strategist Weight                     2.8%
S&P 500 Weight                           3.3%
Fiscal Year Ends (Dec 31)     2002      2003e      2004e       2005e
EPS ($)                       1.72       1.28       1.66        1.48
Prior EPS Ests. ($)           0.00         --         --          --
First Call Consensus ($)    (0.05)       1.11       1.47        1.73

P/E                           12.9       17.3       13.3        15.0
P/E Rel. to (local index) (%)   --         --         --          --
Price/Book                     4.8        4.9        3.7         3.0
EV/EBITDA                     12.0        8.3        6.8         5.8
Yield (%)                      0.0        0.0        0.0         0.0

Market Cap ($mn)          23,278.5
Enterprise Value ($mn)    34,540.3
Debt/Cap (06/03) (%)          71.1
Return on Equity (06/03) (%)  29.0
LT Est EPS Growth ('yy - 'yy) (%)NA
P/E to Growth                   --
Shares Outstanding (mn)    1,052.4

Q'trly                        2002      2003e                  2004e
EPS                         actual       curr      prior
curr     prior
Q1                          (0.35)       0.21       0.00
0.34     --
Q2                            0.07       0.27       0.00
0.40     --
Q3                            0.13      0.46e      0.31e
0.47     --
Q4                            0.20      0.34e         --
0.47     --
e = Morgan Stanley Research estimates
Another Strong Quarter But 2004 Clouds Remain
Company Description
Nextel Corp. is a domestic wireless service provider.  The company is the only
major wireless service operator to offer dispatch (direct-connect)
and cellular
service in the same phone.

Summary and Investment Conclusion
As expected, Nextel reported strong results as year-to-date momentum carried into
the third quarter.  As illustrated below, all important metrics came in ahead of
expectations.  However, we expect virtually all important metrics to show some
deterioration in 4Q03.  Beyond the fourth quarter, our 2004 concerns include a
gradual increase in push-to-talk competition, the need to announce a 3G plan once
the FCC finally makes a spectrum swap decision, a step up in churn due to WLNP,
the possible need to announce that stock options will be expensed, and valuation
with the stock up 85% year to date.  Therefore, we maintain our Equal-weight-V
rating within the context of our Cautious view on Telecom Services.
Net Adds Grow Again - Is This the Start of a Trend?  For several years Nextel has
reported quarterly net additions in the range of 400,000 to 500,000 --- with the
exception of the past two quarters.  We note that the recent increase in net adds
corresponds with a reduction in churn and not with any improvement in gross adds.
Moreover, we are concerned that the sudden drop in churn is more related to
impending WLNP (and the possibility that consumers are waiting to switch
providers) than it is related to anything such as improved customer service or
network quality.  The sluggish improvement in gross additions may be a better
indication as to whether the business is "taking off."
Can Impressive Metrics Improve Any More?
We believe that 3Q03 may represent a high point for several of the key reported
metrics.

ARPU --- ARPU traditionally falls in the fourth quarter of each
year, and into
2004 Nextel will face increasing PTT competition that may eat into
its pricing
umbrella.

Churn --- WLNP is scheduled for November and is likely to drive industry churn
higher, especially considering the possibility that recent churn improvements are
the result of certain consumers waiting for WLNP to switch.  We believe it is
likely that Nextel's 1.4% monthly churn moves higher, even though we believe the
company is one of the best positioned to withstand the effects of WLNP.
Bad Debt --- Reported bad debt to sales expense of 0.7% is extremely low and in
our view, unsustainable.  This ratio benefits from lower churn and could rise
after WLNP.
Marketing Expense --- Nextel is beginning to advertise heavily ahead of WLNP and
PTT competition, and recently signed a 10-year, $700 million promotion deal with
NASCAR.  We expect advertising expenditures to increase, forcing CPGA and CCPU to
move higher.  As we recently pointed out in our report "Here Comes WLNP: Choose
Your Weapons," increased handset subsides may have a similar effect.
Capex to Sales --- The lower-than-expected 3Q03 capex resulted in a capex-to-sales
ratio of 15.5%.  Based on full-year guidance, we believe the fourth quarter ratio
could be 25% or higher.
Valuation:  Maintaining YE04 Price Target of $19
The same is true for 2003 EBITDA and P/E multiples when adjusted for
growth, at
2.0 times and 0.7 times, respectively.  We also take into account
the fact that
NXTL's free cash flow yield in 2004 has dropped to 4.8%, according
to our
estimates, as the stock price has risen.  Our DCF for NXTL suggests
a year-end
2004 valuation of $19, implying a one-year forward EBITDA multiple
of 6 times
relative to 7% three-year forward growth, and a P/E of 13 times
relative to 14%
forward earnings growth.  NXTL appears more fully valued than its
peers in
terms of 2003E and 2004E EBITDA multiples, at 8.1 times and 6.9
times,
respectively.
Risk Factors That May Affect the Stock Price
Prominent risk factors include the following:
(1) wireless number portability, which is a threat to the entire sector.
Although we believe that NXTL is among the better-prepared wireless operators,
there is still tremendous uncertainty surrounding the event and that creates risk;

(2) pricing pressure is likely to persist over the long term as long as there are
six national providers.  A price war could erupt at any time, especially in
conjunction with WLNP;
(3) competitive push-to-talk offerings.  For now, NXTL is more differentiated than
the other nationals, in our view, but competitive PTT offerings could eventually
remove the pricing umbrella;
(4) the company may be forced to expense stock options by 2005.
During 2002,
this would have reduced EPS by 20%; and

(5) after a spectrum swap decision, we believe the company will need to spend a
significant amount on a 3G upgrade.  Because Nextel's path to 3G is less certain
than other carriers, we believe larger, global enterprises might prefer carriers
on GSM or other platforms.
(6) The need for increase advertising, handset subsidies and other promotions may
eat into profitability after WLNP is implemented.

16-Oct-03 Smith Barney Citigroup (Michael Rollins, CFA
NXTL: 3Q Strong and DONE; Points To Better Prospects For '04
HOLD (2)
Speculative (S)
Mkt Cap:
$23,779 mil.
October 16, 2003               SUMMARY
* Nextel produced very strong 3Q
results as
TELECOMMUNICATIONS SERVICES--    stronger revenue set against mixed
cost metrics
WIRELESS                         were accretive to overall free cash
flow, EPS,
Michael Rollins, CFA             and margins.
+1-212-816-1116                * Take-aways from third quarter
results are: 1)
[email-masked]    outlook for reported EPS and FCF is
still
Michael Nelson                   improving as revenue productivity
looks
+1-212-816-3437                  healthier and $1.1 bil. of equity
issuance will
further reduce interest exp.; 2) 3Q
margin of
Thomas P. Vincent                43% may not sustain and depend on direction of
+1-212-816-3247                  churn and bad debt; and 3) estimate capex +
[email-masked]   spectrum cost should be at least $2 bil. for '04,
thereby limiting '04 FCF.
* We have raised our EPS est for 4Q
to $0.40
from $0.29 and FY04 increases to
$1.64 from
$1.40 previously.  However, change
in tax rate
in 2H/04 could drop our estimate of
reported
EPS by 16% in '04 and 31% in '05.
* Maint Hold (2S)rtg, but tgt raised
to $23 to
reflect increased EPS outlook and
that
performance should exceed current
consensus
through year-end. Results alleviate
some
short-term concerns on
sustainability of
metrics such as ARPU.
FUNDAMENTALS
P/E  (12/03E)                  16.5x
P/E  (12/04E)                  13.5x
TEV/EBITDA  (12/03E)            5.9x
TEV/EBITDA  (12/04E)            5.4x
Book Value/Share  (12/03E)        NA
Price/Book Value                  NA
Revenue (12/03E)      $11,800.0 mil.
Proj. Long-Term EPS Growth        NA
ROE  (12/03E)                     NA
Long-Term Debt to Capital(a)      NA
NXTL is in the S&P 500(R) Index.
(a) Data as of most recent quarter

SHARE DATA                          RECOMMENDATION
Price (10/15/03)             $22.12 Rating
(Cur/Prev)                      2S/2S
52-Week Range          $22.12-$8.84 Target Price (Cur/Prev)
$23.00/$20.00
Shares Outstanding(a)  1,075.0 mil. Expected Share Price
Return             4.0%
Div(E) (Cur/Prev)       $0.00/$0.00 Expected Dividend
Yield                 0.0%
Expected Total
Return                   4.0%
EARNINGS PER SHARE
FY ends                 1Q          2Q          3Q          4Q
Full Year
12/02A   Actual     ($0.14)A     $0.06A      $0.14A      $0.21A
$0.27A
12/03E   Current     $0.21A      $0.27A      $0.46A      $0.40E
$1.34E
Previous    $0.21A      $0.27A      $0.35E      $0.29E
$1.12E
12/04E   Current     $0.36E      $0.45E      $0.43E      $0.41E
$1.64E
Previous          NA          NA          NA          NA
$1.40E
12/05E   Current           NA          NA          NA          NA
$1.69E
Previous          NA          NA          NA
NA          NA
First Call Consensus EPS: 12/03E $1.11; 12/04E $1.47; 12/05E $1.48
OPINION

Nextel announced very strong third quarter results and showed it can continue to
improve revenue productivity for its customers.  Stronger revenue on a mix of cost
metrics were accretive to overall free cash flow and margins.  As per the quality
of the results, the improvement in revenue was clearly constructive as the company
continues to benefits from stronger usage (from high-margin overage) and its new
national Push-To-Talk (PTT) program.  However, we are still concerned about the
sustainability of subscriber growth on lower churn without higher gross additions,
while the 43% margin was supported by what we view as an unsustainably low bad
debt expense rate (0.7% of sales) and favorable churn at 1.4%.

Our net take-aways from third quarter results are: 1) outlook for reported EPS and
free cash flow is still improving as revenue productivity looks healthier and $1.1
billion of equity issuance will further reduce interest expense; 2) 3Q margin at
43% may not be sustainable, and depend on bad debt and churn levels; and 3)
capital spending with spectrum investment should be at least $2 billion for '04 by
our estimate, thereby limiting growth in free cash flow.

We maintain our Hold (2S) rating, but are raising our price target to $23 per
share to reflect increase in earnings outlook and recognition that performance
should exceed current consensus through year-end.  This quarter has alleviated
some of our near-term concerns on the sustainability of performance, but we remain
focused on the broader industry risks from local number portability, prospect for
decelerating additions in'04, and likelihood for higher operating and capital
spending costs in response to the competitive pressures from local number
portability. Nextel has continued to surprise to the upside on the momentum to
improve EBITDA and earnings for 2003 that has favorable implications for 2004.
Improvement in revenue productivity is clearly constructive ahead of what we
expect to be a tougher pricing environment. However, underlying cash costs
continue to rise (excluding bad debt and retention) for the second consecutive
quarter, which suggests outsourcing scale has reached its limits and the company
now needs to increase customer operating expenses to support usage and service
levels.
We have revised our estimates on NXTL for the fourth quarter and full-year 2004
based on  strong third quarter performance that implies faster growth during 2003,
but should still significantly decelerate along with the industry during 2004.
Our fourth quarter EPS estimate increases to $0.40 from $0.29 bringing our
full-year 2003 EPS estimate to $1.34, while our 2004 EPS estimate is increased to
$1.64 from $1.40 previously.  We do find increasing prospects for Nextel to change
its accounting practice for tax expense during 2004 that would put downward
pressure on earnings as the company is recognizing only a 6% tax expense rate
during the third quarter.  The change would move the effective tax rate to
35%-40%, by our estimate, and could reduce earnings by 25-30% for the periods in
'04 affected by the change, and then thereafter.  To the extent Nextel recognizes
the up-front benefit of its valuation allowance at mid-year, we believe '04 EPS
could move down to $1.38 from $1.64 and in '05 to $1.16 from $1.69, and then
continue on an organic growth rate of around 3% between 2005 and 2007.  As we have
previously indicated, a simple P/E valuation runs the risk of overstating the
value of Nextel's tax NOLs that only last for a few years. We would note that the
recognition of Nextels valuation allowance may or may not occur but we are merely
highlighting the potential risk.  We have raised our target price for Nextel to
$23 per share from $20 per share previously.  Our target price is based on a
combination of DCF analysis, P/E and P/FCF multiple.  The simple average of our
DCF and trading multiple analyses leads us to our target price of $23. Our DCF
uses a WACC of 9.4% and a terminal growth rate of 2.5%, while we use a P/FCF
multiple of 17 times our '04 FCF estimate of $1.39 per share and a P/E multiple of
15 times our '04 reported EPS estimate of $1.64, which does not normalize the tax
expense.  We have chosen to equal-weight the methodologies as we find the
investment community uses a combination of the three methods to determine
valuation for stocks.  Our previous price target was based on our DCF analysis and
an asset valuation that used 7.0x our 2004 EBITDA estimate.  We believe that since
Nextel has produced steady earnings and free cash flow, our revised a trading
multiple approach in conjunction with our DCF analysis is warranted and more
appropriate.  We do keep track of the implied EBITDA multiple by our analysis,
which stands at 7.2x our '04 estimate, and is similar to the target multiple we
previously applied.

We highlight the following take-aways:

IMPROVING EPS AND FCF OUTLOOK ON FAVORABLE REVENUE TREND AND EQUITY
ISSUANCE

The most important message is that Nextel is continuing to improve its outlook for
earnings and free cash flow generation by capturing better customer spending
levels that are leading to better EBITDA levels, while the unexpected issuance of
equity at almost $1.1 billion has accelerated the reduction in interest expense
beyond our expectations.  We believe Nextel's favorable earnings momentum
continues to support the stock's valuation, although on an intrinsic level, we
believe investors still need to adjust for the lack of a tax expense when
comparing earnings and free cash flow multiples to the telecom and broader market
valuations.  Most importantly, Nextel is committed to achieving an
investment-grade credit rating, which could encourage the company to continue to
use equity in exchange for debt or to reload its direct share purchase program
that has maxed out under the current shelf of $500 million.  The company's debt
leverage has consistently declined for the last two years, and now stands at 2.7x
times '04 EBITDA, which our high-yield telecom research team believes should
result in an upgrade by at least Moody's in the near-term to B1 from B2.

Revenue Trends Remain Favorable -- Nextel's financial performance was boosted by a
significant sequential increase in monthly customer spending to $71/month without
other service revenue, and $72 on a calculated basis versus our estimate of nearly
$70.  The improvement was based on: 1) strong Minutes of Use (MOU) growth that
improved overage revenue; 2) strong take-rate of Nationwide Direct Connect; 3)
increasing contribution from data (but still only around $1) and 4) incremental
revenues from BOOST Mobile. MOU growth was over 15% yoy to 748 during 3Q/03, while
marginal revenue per minute continued to tick-up to $0.08.

We believe BOOST users are averaging around a $40 +/- ARPU, which is enough
combined with its other undisclosed metrics for the company to widen its target
geography over the coming quarters.
Nextel indicated that Nationwide Direct Connect, which was launched in July,
experienced an encouraging take-rate.  Ninety percent (90%)of Nextel's customers
use Direct Connect locally, of which approximately one-third used Nationwide
Direct Connect.  Nextel charges $10/month for unlimited nationwide usage or
$0.10/min on a pay as you go basis. We believe a bulk amount of the revenue came
from incidental per-minute usage, but the participation could encourage users to
sign up for the national unlimited package.

We would note that BOOST Mobile, which is the company's prepaid program that it is
trialing on the West Coast, added 102k customers during 3Q/03 and now has a total
of 245k subscribers.  Although the company does not break-out the subscriber
economics for BOOST, we believe that BOOST is doing well and provided incremental
revenues that helped overall ARPU.  We continue to believe prepaid faces
profitability challenges and we believe Nextel's program also faces the challenges
of transferability to other markets.  We believe the company's test markets,
California and Nevada, are perfect markets to tap the behavioral characteristics
of the youth market.  The company is still evaluating the profitablity of BOOST
and will make a decision on expanding their markets sometime in the future.
Overall, we find that ARPU momentum could provide a positive catalyst for Nextel's
financial performance, but our estimates continue to fall on the more
cautious-side based on the risks to Nextel's premium ARPU within a tough
competitive landscape, which we expect to intensify with LNP implementation.

While a majority of Nextel's customers will be protected by the uniqueness and
differentiation of push-to-talk from line churn, we believe the higher-value
individual segment may bear more risk, especially as business customers will be a
principal target market for carriers such as Sprint and Verizon after LNP is
implemented.  We remain more concerned for the industry about pricing risks over
churn risks within the longer-term business model for wireless carriers.

Financial Leverage Was Further Reduced in the Quarter -- During the quarter Nextel
retired a total of  $2.2 billion of long-term debt and preferred stock in exchange
for $1.76 billion of cash and 30 million shares of common stock valued at $584
million. Nextel issued $2 billion in senior notes during the quarter and raised an
additional $500 million of equity through its direct stock purchase plan. Nextel
now has about $3.6 billion in cash and net debt of around $8.8 billion.  Nextel's
ratio of total debt/EBITDA is 2.7x at the end of 3Q/03.

Nextel also indicated that it is committed to achieving an investment grade
rating, which if achieved, would lower the company's overall cost of capital.

3Q MARGIN AT 43% MAY NOT SUSTAIN AND DEPEND ON BAD DEBT AND CHURN
LEVELS

Nextel's cash flow performance was enhanced by both churn and bad debt expense
improvements.  In fact, both churn at 1.4% and bad debt expense at .8% of service
revenue represent their best performances in the company's history since 1998 in a
very competitive and tough operating environment.

Bad Debt Expense Is Benefiting From Improvement in Aging Accounts - The sequential
drop in bad debt expense was $5 million from $25 million in 2Q/03 to $20 million
in 3Q/03.  Bad debt expense has improved considerably following the conversion of
the company's billing system, outsourcing of care functions, better enforcement of
its credit policies, and new collections systems.

However, write-offs in the quarter of $33 million were still around 160% of the
bad debt expense of $20 million, and imply that the bad debt expense rate will
eventually rise once the aging of receivable accounts reaches a floor, which is
likely close to the current 7% of gross receivables.  The implication is that
Nextel's bad debt expense should rise to eventually approach the write-off levels
at its current churn rate, and potentially higher should involuntary churn begin
to rise from very favorable levels.

We do not see AFDA getting much lower based on the historical trend, which should
begin to push bad debt expense up as early as the fourth quarter.  We see a
sustainable rate of bad debt expense at 2-3% of revenue, which is still below its
historical average, but above the third quarter rate of .8%. We recognize that the
low level of bad debt expense represents Nextel's focus on improving credit
quality screening and collection efforts.  Consequently, we believe bad debt
expense as a percent of revenue will stay below the historical average of 3-5%
over the past five-years.

Churn Levels Are Very Impressive, But the Question is "Why?" -- We believe
Nextel's churn rate is very impressive at 1.4%, which rivals the best levels of
any of the national, regional, and niche carriers.  There is no question that we
have always subscribed to Nextel's thesis that a differentiated sticky product
should support better-than-average churn, but we also believe that customer churn
is subject to a competitive environment for customers that want cheap airtime and
good quality. Nextel has improved its value proposition considerably over the last
36-months on both fronts that has led to the improvement from a peak level of 2.5%
during 1Q/01.
As for the why, we would point to three points:

*   Retention Costs Are Up -- Nextel has substantially increased retention
spending to 3.5% of revenue from historical levels that averaged 1.2% during 2002.
The increase in retention to $91 million in handsets plus additional investment in
its customer care centers is likely leading to some significant degree of
improvement by feeding existing customers with new handsets.

*   Quality Is Improving -- Nextel continues to invest in network quality and
capacity that the company believes is leading to better customer satisfaction. In
fact, Nextel has been at the top or near-the-top of multiple customer surveys that
is encouraging for its voluntary retention rate.  We believe the focus on quality
does infer network investment levels will stay steady over the coming years,
rather than decline substantially.

*   LNP May Be Holding Back Churn -- While the company views itself as a net
beneficiary, we cannot help to listen to other companies indicate that business
gross adds have been soft as customers await the LNP deadline, while mass market
consumers seem less aware. The implication is simply that Nextel's high degree of
business customers could be holding back the normalized level of churn, but we
would also believe Nextel could be a beneficiary of business adds that seek its
differentiated service platform.  Net-net, we believe Nextel will need to improve
gross add productivity to sustain quarterly net add growth at 500k or above.  The
alternative is not a bad idea, which is to accept slower net growth, for a better
quality customer segment, and continue to produce strong cash flow economics.

Going forward, we believe churn will revert back towards 2.1% during 2004 and 2.3%
during 2005, based on the upward pressures from LNP, PTT entrants, and general
industry pressures.  Clearly, a better churn rate than our estimate would also be
constructive for its estimates.

FREE CASH FLOW LEVELS MAY BE LIMITED BY HIGHER INVESTMENT

Nextel reported cash capex of only $431 million in 3Q/03, and has spent less than
two-thirds of its full-year guidance of $1.8 billion. We would expect cell site
deployment to ramp during the fourth-quarter as the company only added 207 sites
to 16.8k, which we have built into our forecasts.  Additionally, capital spending
with spectrum investment should be at least $2 billion for full-year 2004 by our
estimate, thereby limiting growth in free cash flow.  Nextel still has a pending
decision on the table for the WiDEN data service, which upgrades its existing
network to provide hiher-speed data services.  The upgrade, if chosen, would
likely take place during 2004, although the company may soak up excess spending
capacity relative to guidance by investing in some of those software costs for the
upgrade during 2003. Other choices for data are CDMA or Flarion.  However, we
believe that the limitation of spectrum in the absence of getting the clean 1.9
GHz spectrum from the FCC as part of its "Consensus Plan" will increase the
likelihood for WiDEN deployment.  Total investment in data and incremental
capacity based on usage trends is likely to push capex to $1.8 billion with an
additional $200 million allocated for spectrum purchases.

Management indicated that they are in process of deploying 6:1 vocoder software in
the network, which should provide significant capacity gains. The capacity
advantages from the 6:1 vocoder only come when customers use the new handsets.

As a result, we believe the real capacity advantages from the service are not
likely to materialize until the end of '04 or '05 based on a modest delay in new
handsets from our initial timeframe of summer.  These new handsets should also
support a wider spectrum band, including 900 MHz and the 800 MHz Nextel may
receive under the swap proposal.  Motorola believes 6:1 creates a 70-80% lift in
capacity upon full conversion to the new vocoder.  Currently, this assumption is
premised on about 30% of traffic originating from Direct Connect.  Net-net, the
deployment of the vocoder should improve capital efficiency by limiting the amount
of radio and cell site deployments to cover the growth in peak usage within the
network, but the timing of the benefits will depend on handset penetration that
could be slowed by lower churn rates and tiered availability of 6:1 handsets
through 2004.

WE HAVE MADE THE FOLLOWING CHANGES TO OUR ESTIMATES

* Subscribers - We have raised our net add estimate for the fourth quarter, while
our full-year 2004 estimate declines slightly to 550k and
1.5 million, respectively. Our previous estimates were 475k for the fourth quarter
and 1.55 million for the full year 2004. We have lowered our churn estimates to
1.7% from 2.0% for the fourth quarter and to 2.1% from 2.15% for the full-year
2004. Therefore, our reduced 2004 net add estimate is predicated on slightly lower
gross add productivity.

* Revenue and ARPU - We have slightly increased our fourth quarter service revenue
estimate to $2.6 billion from $2.5 billion.  The increase to our forecast is the
result of higher ARPU of $70.12 from $67.25 based on strong third quarter
results.  For 2004, we have increased our service revenue estimate to $11.1
billion from $10.6 billion to reflect the increase in our ARPU forecast to $68.83
from $65.62.

* Operating Cash Flow - Our EBITDA forecast for the fourth quarter is increased to
$1.1 billion from $986 million previously. Our CCPU estimate increases to $24 from
$23.65 due to the higher expense in 3Q/03. We also forecast a higher CPGA of $540
for the fourth quarter versus our previous estimate of $525.  For 2004, we have
increased our EBITDA estimate to $4.515 billion from
$4.183 billion, representing an EBITDA margin of 40%.  Our 2004 CCPU forecast
increases to $24.75 from $23.30 previously while our CPGA estimate for 2004
increases to $550 from $528 to reflect the company's increased effort to focus on
retention and increased marketing efforts.

* Capital Expenditures - We have increased our fourth quarter capex estimate to
$625 million from $550 million, due to lower capex in 3Q.  Our full-year 2003
capex estimate remains unchanged at around $1.8 billion.

* EPS & FCF - We have revised our estimates for fourth quarter and full-year 2004
given our revised revenue and EBITDA estimates.  Our fourth quarter EPS estimate
increases to $0.40 per share from $0.29 per share, while our FCF estimate is
increased to ($0.05) per share from ($0.07) per share.
Full-year

2004 EPS increases to $1.64 per share from $1.40 per share. Free cash flow per
share increases to $1.39 per share from $1.22 per share for 2004.

THIRD QUARTER PERFORMANCE RELATIVE TO SB ESTIMATES
VALUATION
We have raised our target price for Nextel Communications to $23 per share from
$20 per share previously. Our target price is based on a combination of DCF
analysis, P/E and P/FCF multiple.  Previously, our target price was based on a
combination of DCF analysis and asset valuation that was based on a forward EBITDA
multiple, in the absence of positive earnings and free cash flow.   We believe
that since Nextel has produced steady earnings and free cash flow, a trading
multiple analysis is warranted.  The simple average of our DCF and trading
multiple analysis leads us to our target price of $23. We have chosen to
equal-weight the methodologies as we find the investment community uses a
combination of the three methods to determine valuation for stocks.

Our DCF uses an average WACC of 9.4% and terminal growth rate of 2.5% to arrive at
a fair value of $22 per share. Our WACC is derived using CAPM with a Beta of
around 1.5, a risk-free rate of 5.5% and a market risk premium of 4%.  On a free
cash flow basis, we apply a 17 times multiple on our 2004 estimate of $1.39 per
share to arrive at a fair value of about $23 per share.  On a P/E basis, we apply
a 15 times multiple on our 2004 estimate of $1.64, which does not normalize the
tax expense to arrive at a fair value of about $25 per share.

RISKS
We rate Nextel Communications "Speculative Risk" due to the company's high
financial leverage with net debt-to-EBITDA of 2.6x as well as substantial stock
price volatility. We have also considered Nextel's revenue outlook, earnings
leverage, FCF production, and other qualitative factors such as the threat of
competing PTT solutions.

There are numerous risks to our thesis that could negatively affect the share
price and our target valuation.  We find Nextel is still susceptible to the
industry risks of slowing subscriber growth and pricing competition.  Financial
leverage is also a risk for Nextel, but the company has made substantial strides
to improve its financial liquidity with better operating results and reductions in
capital spending.  Over time, we expect Nextel's ARPU to decline as it currently
represents a substantial premium to the industry average.  We believe the risk to
ARPU is greatest once minutes of use plateau.  Nextel also uses a proprietary
technology on SMR spectrum, which may increase the expense of a possible "3G"
migration.  In addition, Nextel faces increased competition to its Direct Connect
product from competing carriers who have announced plans to offer a "push-to-talk"
product.  Also, Nextel's shares could be adversely affected if the company is not
successful in achieving its proposed Public Safety Spectrum Swap with the FCC.

We do find increasing prospects for Nextel to change its accounting practice for
tax expense during 2004 that would put downward pressure on earnings as the
company is recognizing only a 6% tax expense rate during the third quarter.  We
would note that the recognition of Nextels valuation allowance may or may not
occur but we are merely highlighting the potential risk.
If the impact on the company from any of these factors proves to be less than we
anticipate, the stock could materially outperform our target.  Conversely, if the
impact on the company from any of these factors proves to be greater than we
anticipate, the stock will likely have difficulty achieving our target price.

INVESTMENT THESIS
We rate the shares of Nextel Communications (NXTL) Hold/Speculative Risk (2S) with
a target price of $23.  Nextel has created an attractive return profile for its
differentiated service platform by maintaining strong customer quality, improving
its cost structure through a series of outsourcing programs, and reducing its
financial leverage.  Within the last twelve months, Nextel has emerged as the only
large-cap wireless pure-play with significant earnings power and solid free cash
flow to work down its financial leverage. We believe operating performance should
remain solid, but we rate the stock a Hold based on: 1) the underlying increase in
cash operating costs, retention subsidies and acquisition costs during 3Q coupled
with unsustainably low bad debt expense and churn; 2) the growing proportion of
customers within the mass market segment and emerging competitive PTT solutions
that provide less predictable subscriber economics; and 3) our forecast for higher
capital spending during 2004 and beyond for spectrum, wireless data services, and
expansion to a mass market technology.  Overall, we believe our estimates and
valuation for Nextel fairly reflect the company's improvements from its
restructuring initiatives and current performance.  Also, we believe the company
will not receive approval for its  Consensus Plan as is that could considerably
raise the cost of the company s spectrum acquisition initiatives.

COMPANY DESCRIPTION
Nextel offers national wireless service with over 12 million domestic wireless
subscribers.  Nextel and its affiliate, Nextel Partners, currently serve 197 of
the top 200 U.S. markets and provide service in areas where approximately 239
million people live or work. The Nextel National Network offers a fully integrated
wireless communications tool with digital cellular, text/numeric paging, wireless
data services and Nextel Direct Connect (R), a digital two-way radio feature.

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