Subject: [NEXTEL-1] Salomon Smith Barney- Downgrades Nextel: "Plan Scam" & Competition to limit free cash flow in 2003

From: [email-masked]
Date: Sun, 15 Dec 2002 06:01:52 -0500

Salomon Smith Barney- Downgrades Nextel: "Plan Scam" & Competition to limit free cash flow
in 2003

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REDUCING NEXTEL COMMUNICATIONS TO IN-LINE (2S) FROM OUTPERFORM (1S)
We are reducing our rating on Nextel Communications to In-Line (2S) from Outperform (2S),
because we believe our estimates and valuation fairly reflect the improvements from its
restructuring initiatives. We believe Nextel’s differentiated strategy should still offer
a solid
return to investors, but we find Nextel is being fairly valued relative to its peers at
around 6.5x
’03 EBITDA. The stock is up 18% ytd and 302% since the end of 2Q.

We believe Nextel is on track to hit our estimates for top-line growth and EBITDA for 2002
and 2003, but we believe upside to our 2003 free cash flow estimate will be limited from
the potential investment in a spectrum swap with Public Safety users and a tougher
competitive environment.

Net-net, we have increased our target price to $13 from $12 based on a 6.5x 2003 EBITDA
multiple, which
is supported by our DCF analysis.

 Differentiated Strategy Should Begin to Earn a Return in 2003 – We project Nextel
should produce positive free cash flow during 2003 as capital spending should decline from

2002 levels, and the company reaches $3.8 billion of EBITDA. The company should also
produce materially positive earnings during 2003. The company should continue to
improve the rate of return on its iDEN network with a new vocoder planned for mid-2003,

Nextel Is Not Immune to the Competitive Conditions Within the Sector – While we
remain constructive on Nextel’s ability to retain users with its sticky Direct Connect
service,
the company is not immune to the competitive conditions within the industry. The
company’s latest set of 4Q promotions that included a $55 plan for 1,000 peak minutes plus

additional off-peak and Direct Connect minutes is significantly more competitive than
previous offers with respect to included minutes and the lower level of monthly access.
With a monthly revenue commitment around $55, we believe Nextel can cannibalize
overage from its existing customers if it continues to offer these more aggressive rate
plans.
In addition, we do believe Nextel will face push-to-talk competition from which we
perceive the bark to be worse than the bite, initially. The increased focus by its
competitors
could limit improvement in acquisition costs for Nextel from our estimates.