Subject: [NEXTEL-1] The Air's Getting Thin After Nextel's Climb

From: Marcel <[email-masked]>
Date: Fri, 22 Nov 2002 13:10:51 -0500

The Air's Getting Thin After Nextel's Climb

By Kenneth Li
Senior Writer
11/22/2002 07:17 AM EST

Nextel (NXTL:Nasdaq - news - commentary - research - analysis) shares jumped to a 52-week
high Thursday after months of steady gains. Is it time to buy? Perhaps. But a bet on
Nextel isn't without risk.

The No. 5 wireless carrier's shares have more than quadrupled since June, thanks to its
efforts to pare down debt -- but such a dramatic expansion may not be justified, given the
company's goliath $12 billion debt load, growing competition in the industry and a slump
in new wireless customers.

"There's a laundry list of things that could keep upward pressure of the stock," said Jeff
Bray, a telecommunications analyst at David L. Babson, a money-management firm. "It's
going to be tough over the long term. It's realistic to expect that they can cover the
interest. But it's going to be tough to amortize [the debt] for sure."

While medium-term interest payments aren't a concern -- Nextel bonds don't mature until
2007 and it generates enough cash to cover any payments next year -- the company's net
debt is nearly 35% more than its estimated revenue for next year, according to sales
forecasts from Thomson Financial/First Call.

Also, competition is stiff. The nation's No. 1 carrier, Verizon Wireless, and No. 3
carrier, Sprint PCS (PCS:NYSE - news - commentary - research - analysis), are both looking
to offer services similar to Nextel's next year that may "steal from Nextel's growth,"
said Thomas Weisel Partners telecom analyst Ned Zachar.

Moreover, investors worry that the company will need to upgrade its networks in order to
someday offer high-speed wireless-data services. For now, Nextel plans to make lower-cost
improvements to its current hardware that essentially will double the network's voice
capacity by next year. But it's unclear how the company will fund any major upgrades.

Nextel spokeswoman Audrey Schaefer said, "It would be premature to discuss how we would
proceed, considering we don't have a timeline for moving to the next generation or
selected a technology." She added, "The enhancements we are making to the existing
platform give us 3G-like capabilities today. When we see that there's a clear return on an
investment, we will pursue technologies that make sense for our customer."

As for the company's debt, she said, "Our coverage ratios are better than most in the
industry and on par with the best. We just continue to pay the interest. We are in good
position."

Another issue that may keep investors up at night is the fact that one of the company's
largest shareholders, Craig McCaw, has begun hedging his shares in Nextel. McCaw, known in
the industry as the godfather of modern cellular communications, invested $1 billion in
the cash-strapped carrier in 1995 and has continued to invest close to $1 billion in
Nextel shares over the years. He now owns an 8.1% stake.

Recently, the telecom executive has entered into a series of complex "forward sale"
agreements on around 40% of his shares to shield himself from declines, according to
Securities & Exchange Commission filings. These agreements protect him against a drop in
the stock price by locking in a certain price, while also limiting the benefit he would
see from future increases in the price. McCaw's firm, Eagle River Inc., didn't return
calls for comment.

Furthermore, the company's ability to buy back its debt at dramatic discounts is
disappearing, some analysts say. "The return rate has eroded somewhat as bonds have
rallied," said J.P. Morgan wireless services analyst Thomas Lee in a research note. "Going
forward, we expect the company to slow down its debt-buyback program as economics are less
compelling."

So why haven't investors fled Nextel? Quite literally, the bottom line. "The company will
have earnings next year, [and] that will make a difference to investors," said Barbara
Marcin, fund manager of the $26 million Gabelli Blue Chip Value fund. Nextel expects to
swing to a profit of 64 cents on revenue of about $9.9 billion in 2003, according to First
Call estimates. (Nextel makes up about 3% of the Gabelli fund's assets.)

A look at the company's valuation can also make the stock compelling. Sanford C. Bernstein
wireless analyst Alex Trofimoff said the stock trades are at a slight discount when taking
into consideration its enterprise value (market cap plus debt, minus cash) as a multiple
of 2002 earnings before interest, taxes, amortization and depreciation.

Thomas Weisel's Zachar added, "From a valuation perspective, [Nextel investors] are paying
[prices similar] to Sprint PCS, without the difficulties. And you're paying a premium to
AT&T Wireless, but with real momentum and earnings."

Looking ahead to next year, analysts expect the company to record a compounded annual
growth rate of 31% from 2003 through 2007, slightly slower than AT&T Wireless's (AWE:NYSE
- news - commentary - research - analysis) estimated 35% rate, according to Bear Stearns
estimates. Bear Stearns cut its rating to peer perform from outperform in early November,
advising clients to take some profits due to the stock's run-up, but maintained a bullish
stance on Nextel's fundamentals. Bear Stearns has done investment banking for Nextel.

Nextel shares first began to take off after two quarters of unexpectedly strong results.
In July, the company posted second-quarter profit of $325 million, or 37 cents a share. In
October, the company said third-quarter net more than doubled to $526 million, or 58 cents
a share. At a time when competitors were losing customers, Nextel added nearly a million
new ones. Average revenue per subscriber, a closely watched metric, was also way above the
competition.

But what really ignited investors' enthusiasm was Nextel's efforts to cut its debt. Since
the beginning of this year, the company has issued 144 million new Class A shares and has
paid $689 million in cash to buy back $2.6 billion in debt. The company said the move will
help it avoid payments of approximately $4.4 billion in principal and interest over the
life of the securities, or about $235 million a year.

Investors liked the sound of that. On Thursday, the stock closed up 29 cents at $14.01, a
52-week high. Noted Gabelli's Marcin, "Nextel has more risk, [but] where there's more
risk, there's more opportunity."

http://www.thestreet.com/tech/kennethli/10055629_4.html

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