First Union Securities Covers NXTL
By: First Union Securities
11/13/00 8:05:47 AM
Morning Notes:
Visit the CNET Brokerage Center for daily reports from the top Wall Street analysts.
NXTL: HIGHLIGHTS FROM RECENT VISIT WITH MANAGEMENT
Nextel Communications, Inc. (NXTL–OTC)
PRICE: $30.06
52-WEEK RANGE: $83–$28
KEY POINTS
-- Last week, we had an opportunity to visit with Nextel’s
management team at their corporate offices.
-- In our opinion, Nextel realized a significant “win” after the FCC
ruled to increase available spectrum in the 900 MHz band for
commercial use by 5 MHz. If acquired, this would increase Nextel’s
usable spectrum position from 18 MHz to 23 MHz.
-- We view this as a significant positive for the company as it should
make them less dependent on the upcoming spectrum auctions
-- Given what we think are the somewhat irrational offerings available
in the market place today, we believe the company may experience
slower subscriber growth and higher churn in the near term.
-- We would note these are all near-term concerns. We would
definitely consider revisiting our rating with a positive bias once we
get beyond the fourth quarter, all else being equal.
-- Our price target of $52 remains unchanged. We arrive at this target using a DCF analysis with a
10 times terminal multiple and a 13% discount rate.
DETAILS
Last week we had an opportunity to visit with Nextel’s management team at their corporate offices
in Reston, Virginia. Since October 26, the stock has been trading basically flat. The reasons for our
recent downgrade included competition concerns as well as Nextel’s exposure to upcoming
spectrum auctions. We continue to believe the company is well positioned in the long-term given its
differentiated product offering. However, given somewhat irrational offerings available in the market
place today, we believe the company may experience slower subscriber growth and higher churn in
the near-term. We have listed below some of the highlights from our meetings.
SPECTRUM POSITION – Last week Nextel realized a significant “win” in our opinion. The FCC
ruled to increase available spectrum in the 900 MHz band for commercial use by 5 MHz. This is
significant for Nextel as it allows them to acquire spectrum previously reserved for businesses and
industrial / land transportation uses. We do not believe Nextel will compete with many other
operators to acquire this spectrum as it would not be as attractive to PCS companies that operate
on a much higher band (1900 MHz) of the spectrum channel. With the 800 MHz spectrum alone,
Nextel could increase its usable spectrum position to 23 MHz from its current 18 MHz level.
Separately, the FCC also issued a notice of proposed rule making to open 5 MHz of 900 MHz
spectrum for commercial operators.
Steve Shindler, Nextel’s CFO, indicated the company has filed to participate in the upcoming
Nextwave re-auction (scheduled for December 12th). The company will bid with an unnamed
designated entity as well as on a stand-alone basis. Given the greater availability of spectrum,
management indicated they would only be aggressive if prices were considered “reasonable.” We
would note we have begun to see some rationalization of spectrum prices abroad from the recent
auctions in Italy and Austria. Management also indicated they would most likely not be aggressive
in any one city in order to achieve a broader footprint. However, Tim Donahue, Nextel’s CEO, did
indicated it may cherry-pick properties to use them as a “bargaining chip” for possible spectrum
swaps.
Overall, we believe Nextel is in a very good position going into the spectrum auctions. The company
has quietly been acquiring spectrum over the past few months. Last week's development is
significant, in our view, in that it offers Nextel more opportunities to acquire spectrum at a
reasonable price. Management seems confident that the “spectrum issue is behind them.”
MIGRATION PATH TO 3G - One of the biggest questions regarding Nextel is its migration path to
3G. Management indicated it is still in the process of deciding which migration path to chose for a
3G solution. Tim Donahue, Nextel’s CEO, said Nextel has abandoned the EDGE solution
completely. The company is considering a 1XRTT solution or another broadband solution. If the
company were to deploy 1XRTT it would require at least 10 MHz of contiguous spectrum. The
company currently owns 10 MHz of contiguous spectrum in the upper 200 channel range (861 MHz
– 866 MHz). While Nextel owns this spectrum, other companies are currently occupying some
channels. Management indicated approximately 80% of the “clearing” of this spectrum has occurred
and expects to be completed in the first half of 2001.
INTERNATIONAL…HIDDEN GEM – Nextel refiled its S-1 with the SEC for an IPO of its international
operations. Management indicated the SEC had only 3-4 comments to which Nextel had to
respond. However, Steve Shindler, Nextel’s CFO and CEO of international operations, indicated it
may be difficult to get a deal done before year-end given the general negative sentiment overhanging
wireless at this time. We continue to believe this set of assets is not fully reflected in Nextel’s
current valuation. The company owns approximately 240MM proportionate international POPs –
roughly the same size as its domestic footprint. This division is expected to reach positive EBITDA
in 2001. We continue to believe the company will realize strong international subscriber growth,
especially from the company’s Latin American properties.
NEAR-TERM EXPECTATIONS – Management would not offer additional guidance for Q4’00 other
than to say net additions will be over 500,000 and the company’s domestic operations are on track
to report domestic EBITDA of $1.4 billion - $1.5 billion for the year. Donahue did say that the
company would remain focused on “balanced growth” and would not sacrifice ARPU and cash flow
gains for lower quality subscriber gains. While we view this as the right strategy for Nextel’s
long-term business model, the market clearly seems to be rewarding those wireless service
companies with higher net additions and market share gains. Management indicated some of the
competition is going after Nextel’s business market focus. For example, VoiceStream and Verizon
Wireless are offering free unlimited mobile-to- mobile minutes. While we acknowledge these do not
offer the same advantages as Nextel’s direct connect system, we believe this will give the “typical
Nextel user” more of a reason to pause when making a decision on which mobile device to
purchase. This in turn lengthens the sales cycle significantly and may result in lower net additions
and higher churn in the near term.
Our current Q4’00 net addition estimate is 535,000. We believe this may be a bit aggressive and
would look for the company to achieve approximately 515,000 net additions for the quarter.
Additionally, we believe churn may come in higher than our 2.0% estimate as a result of the more
competitive environment.
OTHER – Nextel is aggressively moving forward in the roll-out of its data offering. The company is
working to deepen its data offering to select business users by presenting a wide range of
applications and partnerships which will allow the client to customize the data offering for their
particular needs.
The company plans to introduce at least 5 new handsets next year. All handsets will be “data
capable” with an installed microbroser. The new handsets are expected to be more similar to the
“typical” consumer handset – smaller and sleeker than Nextel’s current phone. We believe this may
help the company penetrate the high-end consumer segment.
The company continues to make incremental investments to improve its own internal operations.
Nextel plans to spend $80MM next year to improve customer care, convert its billing system and
improve its inventory management. The company is now in the process of reorganizing the
company from 14 different geographic regions to 5. We believe this focus on cost containment will
allow for more scale in the long-term business model. We remain confident Nextel will be able to
achieve similar margins as other more mature wireless operators.
CONCLUSION
We are maintaining our Buy (2) rating on the shares of Nextel. While we believe the company’s
spectrum position has significantly improved, we continue to remain concerned about the near-term
competition. Carriers are directly going after Nextel’s market share and differentiated service
offering. This confusion in the market place may in turn make it difficult for Nextel to continue to
achieve the growth levels it has experienced in the past. In the long term, we believe Nextel’s focus
on balanced growth is the right strategy. Our price target of $52 remains unchanged. We arrive at
this target using a discounted cash flow (DCF) analysis with a 10 times terminal multiple and a
13% discount rate.
cnetinvestor.com |
