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What's next for Nextel?
The wireless carrier reported strong first-quarter numbers but it's no longer a market darling.
April 22, 2004: 1:04 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - There's been good news galore from companies in the wireless sector recently.

Cell phone carriers Sprint PCS and Cingular earlier this week reported relatively strong subscriber and revenue growth for the first quarter.

And equipment companies Texas Instruments, Motorola, and Qualcomm all posted spectacular results for the latest quarter.

That brings us to Nextel, one of the best performing wireless companies in recent years thanks to its DirectConnect push-to-talk technology, which made the cell phone company popular with blue-collar workers and others in the business and corporate market.

Nextel reported outstanding first-quarter results Thursday morning. Earnings more than doubled, sales jumped 31 percent and the company added 474,000 subscribers.

The news helped boost the stock nearly 2 percent Thursday but Nextel (NXTL: Research, Estimates) is no longer the market darling it once was. The stock is off more than 10 percent so far this year and analysts are starting to express concerns about whether Nextel can remain one of the top companies in the sector.

Competition's picking up ...

For one, while Nextel reported a nice gain in subscribers, it was less than many analysts were expecting. "I was disappointed," said Patrick Comack, an analyst with Guzman & Co., who said that he and others on the Street were looking for Nextel to add more than 500,000 subscribers in the quarter.

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Nextel has yet to start selling camera phones, Comack noted, one of the hottest products in consumer electronics, hurting growth. And Nextel appears to have taken a hit from new rules that allow cell phone users to switch carriers but keep their numbers.

Nextel was expected to be relatively immune from number portability, but the company's churn, a level of customer retention, rose from 1.5 percent in the fourth quarter to 1.7 percent in the first quarter. Nextel's churn rate is still the lowest in the industry but the rise is still a concern, Comack said.

Longer-term, there are worries about Nextel losing its unique edge. Verizon Wireless, Sprint and Alltel have launched their own push-to-talk offerings.

"There are concerns about rising competition and there is still more to come," said Kevin Roe, an analyst with Roe Equity Research, who points out that Cingular and T-Mobile will probably have their own walkie-talkie like services in the near future. Cingular is co-owned by Baby Bells SBC and BellSouth.

...and so should capital expenditures

But perhaps the biggest issue facing Nextel is that it might be forced to raise spending substantially to stay competitive, which could eat into profits and cash flow.

To that end, Nextel is trying to get a new piece of the wireless spectrum from the Federal Communications Commission since there is often interference between Nextel's call traffic and frequencies used by public safety departments during emergencies.

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Nextel has proposed a spectrum swap (i.e., it will get the new spectrum for free) but has also offered to pay $850 million to public safety departments nationwide so they can upgrade their equipment. But competitors such as Verizon Wireless have criticized Nextel's plan, arguing it would be getting valuable spectrum on the cheap.

For that reason, analysts expect the FCC to charge Nextel as much as $2 billion to use new spectrum, in addition to the $850 million payout for equipment upgrades. But Nextel could be forced to pay more since Verizon Wireless has proposed paying at least $5 billion for the spectrum.

Regardless of how that controversy pans out, Ben Abramovitz, an analyst with Jefferies & Co., adds that Nextel will also need to spend billions more over the next few years to upgrade its network and make it able to transmit high-speed data.

If Nextel does not upgrade, it could lose ground to companies like Verizon Wireless and Sprint, which have been aggressively promoting data services.

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With all that in mind, Abramovitz thinks the stock, despite its recent pullback, is not that much of a bargain right now. He thinks it's fairly valued at $26, about 3 percent higher than where it was trading Thursday.

The bottom line is that Nextel, like many other tech stock darlings of 2003, is a bit of a victim of its own success. The stock soared 144 percent last year, as investors recognized that Nextel did a good job trimming debt, adding subscribers and generating the most revenue per customer in the wireless sector.

But that's old news. Once Wall Street has a better idea of what's next for Nextel, the stock might be ready to head higher once again.

Analysts quoted in this story do not owns shares of Nextel or other companies mentioned. Guzman & Co. has done investment banking for Nextel but the other firms have no investment banking ties to the company.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.