NXTL: INCREASE EXPECTATIONS--PRICE OBJECTIVE UP TO $55/SHARE--STRONG BUY
Deutsche Banc Alex. Brown - US Equities
Jeffrey L. Hines,Bo Fifer
June 14, 1999
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NEXTEL COMMUNICATIONS INC. [NXTL] "STRONG BUY"
Increase Expectations--Price Objective Up To $55/Share--Reiterate "Strong
Buy"
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Date: 06/11/1999 EPS 1998A 1999E 2000E
Price: 37.0 1Q (1.53) (1.66)A (0.93)
52-Wk Range: 43 - 15 2Q (1.94) (1.38) (0.91)
Ann Dividend: 0.0 3Q (1.56) (1.17) (0.79)
Ann Div Yld: 0.00% 4Q (1.43) (1.06) (0.59)
Mkt Cap (mm): 14,578 FY(Dec.) (6.46) (5.27) (3.22)
3-Yr Growth: FY P/EPS NM NM NM
CY EPS (6.46) (5.27) (3.22)
Est. Changed Yes CY P/EPS NM NM NM
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Industry: COMMUNICATIONS
Shares Outstanding(Mil.): 394.0
Return On Equity (1998) : 0.0%
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HIGHLIGHTS:
--WE ARE INCREASING OUR EXPECTATIONS FOR NEXTEL COMMUNICATIONS AND
REITERATING OUR "STRONG BUY" (1) INVESTMENT RATING ON NXTL. Based on
our DCF, our 12-month price objective is now $55/share, up from our
previous objective of $51/share.
--Drivers behind upgraded views:
1. $500 MM (+) CONVERTIBLE BOND OFFERING. Nextel completed a $500 MM
convertible bond offering on Friday (11-June). With these funds ($600 MM
if the "green-shoe" is exercised), Nextel is now fully-funded (U.S. &
domestic) into 2001! Thus, not only has the financing risk of this story
dropped to near nil, but Nextel has also increased flexibility to
accelerate plans, which we belive they will (and have incorporated into our
new forecasts for the Company).
2. MANAGEMENT BULLISHNESS SEEMS TO BE ON THE UPSWING. Recent discussions
with senior Nextel management would indicate to us that even our newly
upgraded expectations could fail to properly incorporate additional
subscribers, revenues and cash flows from a whole series of new product and
service roll-outs beginning with the i2000 (Nextel Worldwide Service) and
i1000plus (Internet enabled phone) later this year.
3. AT $37/SHARE, NXTL HAS ALMOST 50% UPSIDE TO OUR PRICE OBJECTIVE OF
$55/SHARE. Moreover, using Nextel's relative valuation to several other
wireless names in the U.S. would imply that a significantly higher
objective would be warranted.
--STOCK PRICE PERFORMANCE: YTD, NXTL is up 57%, in-line with our PCS Index
(up 53%) and ahead of the S&P500 (up 5%).
DETAILS:
We are increasing our expectations for Nextel Communications and
reiterating our "strong buy" (1) investment rating. Based on our DCF, our
12-month price objective is now $55/share, up from our previous objective
of $51/share. There are several elements behind our increased expectations
and we have highlighted three of them below.
Convertible debt financing leaves the Company fully-funded, with
significant flexibility into 2001
Nextel completed a $500 MM convertible bond offering on Friday (11-June).
The convertible bonds yield 4.75% cash interest payment, are non-callable
for 3-years, and are convertible at $47.307 (up 27% from where the stock
was trading when the bonds were issued). With these funds (which will rise
to $600 MM if the "green-shoe" is exercised), Nextel is now fully-funded
(U.S. & domestic) into 2001!
Expected sources of funds (MM) 2Q 1999 - 4Q 2000
Cash (3/31/1999) $ 246
Credit facility 1,100
Microsoft investment 600
Convertible bond issue 600
Towers transaction 560
McCaw 1999 transactions 278
EBITDA U.S. 2,061
TOTAL EXPECTED SOURCES OF CASH $5,445
Expected uses of funds (MM)
U.S. Capital Expenditures $3,191
International Capital Expenditures 745
International EBITDA losses 215
Cash interest expenses 970
TOTAL EXPECTED USES OF CASH $5,121
CURRENT EXPECTED CASH SURPLUS (12/31/2000) $ 324
We currently expect Nextel to be close to free cash flow positive in 2001.
Thus, not only has the financing risk of this story dropped to near nil,
but Nextel has also increased flexibility to accelerate plans, which we
belive they will. We have incorporated this flexibility into our model in
the form of upgraded expectations as are shown below.
Management bullishness seems on the upswing and while 2Q 1999 will be
better than 1Q 1999 we suspect that the rest of 1999 is likely to be above
expectations as well
Recent discussions with senior Nextel management would indicate to us that
even our newly upgraded expectations could fail to properly incorporate
additional subscribers, revenues and cash flows from a whole series of new
product and service roll-outs beginning with the i2000 (Nextel Worldwide
Service) and i1000plus (Internet enabled phone) later this year.
The i2000, which is Motorola's dual-mode, dual-band (900 MHz GSM / 800 MHz
iDEN) model is expected during 3Q 1999. When Nextel launches its worldwide
roaming service (expected around this same time) the Company expects to
have at least 60 countries where the i2000 phone will work (one phone, one
number, one bill, all from Nextel). Nextel's own studies have shown that
there are approximately 5.0 million U.S. residents who travel abroad at
least three times per year and the Company's own experience in rent GSM
phones to its subscriber base is that they currently generate $400 of
service revenue per trip taken. While the exact size of this market is not
known, even $200 per trip, would imply a $3 billion of revenue market
($200/trip x 3 trips x 5.0 million). Nextel's advantage will likely be
twofold. One, its coverage is generally better than the GSM operators here
in the U.S. Two, there is no GSM service in Mexico, Brazil, Argentina and
Peru currently, and thus, for worldwide subscribers travelling to these
regions the i2000 will be of critical importance.
Secondly, we continue to expect Nextel to be the first company in the U.S.
to roll-out a wireless/packet based Internet service on a broad scale. The
Company announced last Monday (7-June at the Deutsche Banc Alex. Brown
Telecom/Media conference in New York City) that it had begun receiving the
i1000plus Internet enabled phone from Motorola already (i.e., ahead of
schedule). Thus, while the Company will begin beta testing the service in
6 markets during 2H 1999, we suspect that when it launches the service in
2000 that it could have upwards of 1.0 million Internet enabled phones
already in the hands of its subscribers. While the Company has not yet set
pricing of the service, it is certainly plausible to look at a scenario
where i1000plus wireless Internet subscribers pay an additional $5-10 per
month and that these subscribers represent a significant percentage of the
subscriber base. We have not explicitly added any line items for these
data services in our model and continue to believe that significant upside
exists due to these services (and not just for Nextel, but for the wireless
industry as a whole).
Finally, Nextel has all but conceded that 2Q 1999 results (subscriber
growth, average revenue per subscriber, etc.) will be higher than 1Q 1999.
We have incorporated these upwardly revised expectations, plus more, into
our new expectations for the Company. For example, some of the changes are
highlighted below:
Metric OLD 1999 Estimate Current 1999 Estimate
Net subscriber additions 1.603 million 1.633 million
Average revenue per unit (ARPU) $69.23/month $70.10/month
Cash flow (EBITDA) $620 million $645 million
Source: Deutsche Bank estimates.
Stock at significant discount to our underlying asset value and looks even
cheaper relative to the comparable names in the group
At $37/share, the stock has almost 50% upside potential to our 12-month
price objective (based on our DCF) of $55/share. We note that the Company
has consistently ranked as one of the best performing in the sector. In
our quarterly PCS Value Metric study, which shows the relative performance
between the eight publicly traded PCS companies that we track (Aerial,
Clearnet, Microcell, Omnipoint, Powertel, Sprint PCS, and VoiceStream),
Nextel has finished first (as the best performing company) in four of the
past five quarters. Moreover, using Nextel's relative valuation to several
other wireless names in the U.S. would imply that a significantly higher
objective would be warranted.
Relative valuation: Per POP, Per SUB
Nextel's relative valuation would seemingly imply that an even higher than
$55/share price is warranted. For example, Nextel currently trades at
$78/POP (enterprise value per population) and $4,621/SUB (enterprise
value per subscriber) versus the peer group average of $89/POP and
$4,591/SUB. Moreover, Nextel trades at a significant discount to Sprint
PCS -- the other nationwide wireless operator -- who is currently
commanding a $150/POP and $6,286/SUB value:
Metric NEXTEL SPRINT PCS U.S. PCS AVERAGE
EV Per POP $78 $150 $89
EV Per SUB $4,261 $6,286 $4,591
EV = Enterprise Value = Equity value + Net debt.
Source: Deutsche Bank estimates.
Relative value: Multiple of cash flow
On an enterprise value multiple of 1999 and 2000 cash flow, Nextel trades
at 29.0x and 12.5x, based on our estimates of $645 and $1,498 million,
respectively. Our estimates are not expecting any positive cash flow from
any of the comparables for 1999 and only a small positive amount is
currently expected from Powertel in 2000.
Relative value: Multiple of revenues
On an enterprise value multiple of revenues, we note that Nextel's
valuation also pales relative to the comparables.
Company 1999E Revenues Multiple of revenues
Sprint PCS $2,587 14.1x
VoiceStream $ 298 13.0x
Clearnet $ 193 12.6x
Omnipoint $ 320 12.1x
Microcell $ 167 11.8x
PCS Average $7,481 11.5x
Aerial $ 218 8.6x
Powertel $ 233 8.1x
Nextel $3,175 7.2x
Source: Deutsche Bank estimates.
Moreover, our own analysis has indicated that the value of a Nextel
subscriber is significantly higher than any of the peer PCS companies:
Company Subscriber Value* Subscriber value versus Nextel
Nextel $2,189 100%
Clearnet $1,021 47%
VoiceStream $1,016 46%
PCS Average $ 818 37%
Microcell $ 994 45%
Powertel $ 864 40%
Sprint PCS $ 719 33%
Omnipoint $ 670 31%
Aerial $ 446 20%
* Subscriber value calculated by taking average revenue per unit divided
by churn rate and discounted back over expected life of the subscriber
by 15%, less cost of acquisition.
Source: Deutsche Bank estimates.
Thus, the average PCS company is currently generating subscribers with a
net present value ("subscriber value") of just 37% ($818) of a Nextel
subscriber ($2,189) and yet Nextel's current enterprise value per
subscriber is actually slightly less ($4,261) than the average PCS company
($4,591). Even more interesting is Sprint PCS, whose enterprise value is
at a 48% premium to Nextel despite the fact that a Sprint PCS subscriber is
currently just 33% as valuable.
Enterprise EV/SUB divided by
Company Value per Sub Subscriber Value Subscriber Value
Sprint PCS $6,286 $ 719 8.7
Aerial $3,682 $ 446 8.3
Omnipoint $4,336 $ 670 6.5
PCS Average $4,591 $ 818 5.6
VoiceStream $4,840 $1,016 4.8
Powertel $3,813 $ 864 4.4
Clearnet $2,797 $1,021 2.7
Microcell $2,303 $ 994 2.3
Nextel $4,261 $2,189 1.9
Source: Deutsche Bank estimates.
The above chart is perhaps the most representative of the valuation
difference between Nextel and its PCS peers. What it shows is that Nextel
currently is trading at 1.9x its subscriber value (as is calculated above)
versus the average PCS company which is trading at 5.6x and versus Sprint
PCS which is trading at 8.7x. Incorporating a growth adjusted metric (like
a P/E to growth calculation) leads to very much the same results:
Growth adjusted
Enterprise EV/SUB divided by
Company Value per Sub Subscriber Value Subscriber Value*
Aerial $3,682 $ 446 15.6
Omnipoint $4,336 $ 670 15.0
Sprint PCS $6,286 $ 719 8.7
PCS Average $4,591 $ 818 8.4
Powertel $3,813 $ 864 7.1
VoiceStream $4,840 $1,016 5.6
Clearnet $2,797 $1,021 4.0
Microcell $2,303 $ 994 3.2
Nextel $4,261 $2,189 3.2
* Sprint PCS subscriber growth rate is factored as 1.0 and all other
growth rates relative to Sprint PCS
Source: Deutsche Bank estimates.
What is shown above is that Nextel currently is trading at 3.2x its growth-
adjusted subscriber value (as is calculated above) versus the average PCS
company which is trading at 8.4x and versus Sprint PCS which is trading at
8.7x. No matter how one slices it up, Nextel's relative valuation versus
the peer group would seem to argue for a higher valuation. |
