BARRON'S ONLINE: Will Nextel's Stock Disconnect?
29 Jan 08:00
By Eric C. Fleming
Weekday Trader
(This item was originally published late Tuesday).
It would have been a smart call had you made it.
Shares of Nextel Communications, the fifth-largest U.S. wireless-service
company, have quadrupled since last June. While rivals like Cingular have
struggled, Nextel's 10.1-million subscriber base grew nicely in the third
quarter, up 25% from same period a year ago.
Nextel's proprietary Direct Connect, a "walkie-talkie" push-to-talk feature
that connects callers at the push of a button, has become popular with small
businesses, technicians and construction workers. It may be the wireless
industry's hottest product.
It should help push Nextel`s fourth-quarter ARPU (average revenue per user)
to $70, 28% higher than the projected $54.72 industry average, according to
Legg Mason analyst Craig Mallitz. (Wireless companies use ARPU to determine how
lucrative customers are.)
That's helping Nextel inch closer to its first full year of profitability,
expected in 2003. It turned its first quarterly profit of 14 cents a share in
the third quarter, according to Thomson/First Call.
This month, chief executive officer Tim Donahue said the fourth quarter would
be the second in a row in which Nextel has generated positive free cash flow.
Nextel also has retired $2.6 billion in debt, swapping it out for preferred
equity and cash.
Nextel shares are now just 10% below their 52-week high of 14.67 reached in
November.
But Nextel's push-to-talk monopoly may end as rivals like Sprint PCS develop
similar technologies, making Nextel just one more relatively small wireless
provider using a technology that is incongruous with other networks.
"These companies could trounce [Nextel], they could subsidize their
push-to-talk features and it would drown out Nextel," says Albert Lin, analyst
at American Technology Research.
"Nextel's market isn't mature, but it's maturing, and that's with a backdrop
of increased competition," he adds.
That's one reason Lin sees Nextel's prized ARPU dropping about $2.00 to $3.00
per user next year, or about 4%, from 2002's levels.
With competition looming, "I don't think I'd be chasing either [Nextel] stock
or bonds," says Peter DeCaprio, high-yield analyst at Evergreen Investments.
Nextel also may no longer be immune to other problems endemic to the wireless
industry, such as cutthroat pricing and the use of prepaid calling plans.
Nextel offered two $40-per-month discount calling plans earlier this week.
That could help it increase subscribers, but possibly at the expense of its
ARPU, says Lin.
Furthermore, push-to-talk may prove to be a niche product that has a smaller
reach than expected.
"I'm not sure how much it grows from here," says DeCaprio.
Nextel has kept its first-mover advantage in push-to-talk because iDEN-its
proprietary technology developed by Motorola--was made to handle two-way
broadcasts.
Other wireless technologies, like CDMA, were designed for standard wireless
calls, which makes developing push-to-talk technology for CDMA or other
technologies like GSM very tricky.
Tricky or no, Sprint PCS, which uses CDMA, said this month that it plans to
roll out a push-to-talk feature later this year, with testing likely to begin
in the spring or summer, says Lin.
AT&T Wireless, number three in the U.S., may add push-to-talk by the end of
2004, if not sooner, as part of the next-generation 3G services it's expected
to roll out in the U.S., a company spokesperson says.
Verizon Wireless, the largest U.S. wireless carrier with 32 million
subscribers, also has plans to introduce push-to-talk this year.
The rising competition may come amid a slowdown in the wireless market in the
near future, opines Goldman Sachs analyst Frank Governali.
Legg Mason, which believes that the U.S. wireless market is only 50%
penetrated, expects fourth-quarter net subscriber additions to be 3.2 million
for the six largest providers, down 26% from last year.
Friedland sees Nextel`s net subscriber additions dropping to 1.5 million next
year, from an expected 1.9 million in 2002.
And, while Nextel has retired some debt, another $13 billion remains. Through
September, Nextel had a burdensome debt-to-capital ratio of 90%.
Nextel's stock also seems to have priced in most of the recent good news.
Its shares sell at nearly 22 times book value, while rival AT&T Wireless
trades at less than its book value.
Nextel also changes hands at a nice premium to its expected long-term annual
earnings growth rate of 15% (see At a Glance). That growth rate may slip,
however, as rivals chip away at Direct Connect.
Drake Johnstone, analyst at Davenport & Co., points out that if Nextel has to
spend billions of dollars more to keep its network competitive, then the
company could go into the red.
(Nextel did not make officials available for comment by deadline.)
To be sure, Nextel will expand Direct Connect nationwide by the third
quarter, and new technology should help its network handle twice as many
customers, says DeCaprio. And Sprint PCS and other competitors may not get
their push-to-talk features off the ground.
But once they do, Nextel could lose its edge-and that may be too late for
investors to get on the horn and take some profits from the stock's great run.
(END) Dow Jones Newswires
01-29-03 0800ET |
