Nextel Falls After J.P. Morgan Note Raises Issues
Tuesday October 8, 1:38 pm ET
biz.yahoo.com
CHICAGO (Reuters) - Shares of Nextel Communications Inc. (NasdaqNM:NXTL) fell 8 percent on Tuesday after J.P. Morgan said it believed the No. 5 U.S. wireless telephone company was underreporting its bad debt expense and customer turnover rate.
Shares of Nextel fell 64 cents to $7.10 on Nasdaq in morning trade. The stock has swung from a high of $12.31 to a low of $2.50 in the past year.
"We would like to see three improvements in Nextel's financial reporting," J.P. Morgan analyst Thomas Lee said in a research note.
"First, we believe the company is not recognizing sufficient levels of bad debt expense... second, the company exercises seemingly wide discretion in recognizing (customer turnover) and third, we believe second quarter 2002 results were somewhat artificially enhanced by timing benefits and one-time adjustments," he said.
Nextel Chief Financial Officer Paul Saleh told Reuters the report "was without merit."
"We have very strict and conservative accounting policies and we have been following them for quite some time now," Saleh said. "In fact, we have been tightening our credit processes which has really contributed to our bad debt expense trending downward."
A company's bad debt expense rises when customers fail to pay for service on time. Lee said Nextel's bad debt expense looked low in light of the rise the company has seen in the number of days that bills are outstanding.
"Our analysis suggests that Nextel is probably understating its current (customer turnover) rate by about 30-40 basis points and bad debt by as much as $22 million in second quarter 2002 alone," Lee said.
Nextel added 471,000 new customers to its U.S. service in the second quarter for a total of 9.64 million, helped by a very low customer turnover rate. It also posted an unexpected profit for the first time thanks to strong customer demand and one of the industry's highest average monthly revenue per user.
Since late last year, the U.S. wireless industry has started to see a slowdown in customer demand and an increase in competition after years of frenetic gains, but Nextel has continued to post strong quarterly results due to its devoted following for Direct Connect, a walkie-talkie like service used by technicians, construction crews and other professionals.
Todd Bernier, wireless analyst with Morningstar, said he agreed with Lee that better disclosure was needed, but said he disagreed with Lee's conclusions about customer turnover.
"He compares AT&T Wireless (NYSE:AWE - News) to Sprint PCS (NYSE:PCS - News) to Nextel. I'm not sure you can basically call them all the same," he said. "There's a lot of discretion in how these companies account for churn (turnover)."
Bernier pointed out companies use different reporting standards for customer turnover because it's not an official performance measure. |
