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Get Four
|  | DECEMBER 2, 2003
 FOCUS STOCK By Kenneth Leon An Easy Call on Nextel Partners Back-office support from Nextel Communications lowers costs for this smaller-market wireless provider and helps it earn S&P's top rating The seemingly inescapable chirping of Direct Connect wireless phones may set some teeth on edge, but it's a sweet sound to shareholders of Nextel Partners (NXTP ). Standard & Poor's views the shares as attractive, when judged against the outfit's peers and the S&P 500-stock index. The stock, which has pulled back 12% from its recent 52-week high and now trades at around $11.50, carries our highest investment recommendation of 5 STARS, or buy. Partners offer Nextel-branded wireless communications services in midsize and smaller markets throughout the U.S. It was a late entrant into the industry, and its financial and operating metrics such as EBITDA (earnings before interest, taxes, depreciation, and amortization) service margins have lagged its peers. We think better times lie ahead, however. We believe a positive catalyst for the shares would be a better-than-expected EBITDA margin from Partners in the next two quarters, possibly leading to profitability by the first quarter of 2004. In addition, we believe management continues to strengthen the balance sheet with recent debt refinancing, and the company expects to generate free cash flow in the first quarter of 2004. SMALL IS BEAUTIFUL. Nextel Partners is 31%-owned by Nextel Communications (NXTL: S&P ranking, 5 STARS, $25), its largest shareholder. (Subsequent mentions of "Nextel" refer to Nextel Communications unless otherwise indicated.) The relationship was created to accelerate the buildout and expand the reach of the Nextel Digital Mobile Network. While AT&T Wireless, Nextel, and Sprint PCS were involved with affiliate startups to enter smaller markets, only Nextel was successful in building Nextel Partners as a financially stable competitor in its service areas. Nextel Communications and Nextel Partners entered a joint-venture agreement in January, 1999, which stipulates that any prospective acquirer of Nextel would be obligated to merge with or acquire Nextel Partners. The agreement also states that Nextel Communications cannot sell its ownership interest in Nextel Partners, and Nextel Communications is obligated to exercise the purchase of the remaining outstanding shares of Nextel Partners by Jan. 29, 2008. The joint-venture agreement has other advantages, in our view. For example, Partners uses Nextel's systems and back-office support centers to service its customers. Nextel charges the company a low fee, which will not increase anytime soon, as Partners expands its business. The fees are tied to Nextel telemarketing and customer care, fulfillment, activations, and billing for the national accounts. Indirectly, we think Partners enjoys the benefits of Nextel's national advertising program and NASCAR sponsorship, with select racing events within its service territories. This allows Partners to channel its marketing costs directly to customer-acquisition and -retention initiatives. MUTUAL ADVANTAGE. Finally, we see the Nextel joint-venture agreement as beneficial to both companies. Nextel can focus on the top 100 U.S. markets, as Partners tries to increase its foothold in the secondary and tertiary markets. Partners hold licenses for wireless frequencies in selected areas of the Central and Southeastern U.S., where more than 53 million people live and work. It offers Direct Connect (long-range digital walkie-talkie service), wireless data services, including e-mail, text messaging and Nextel Online, which provides wireless access to the Internet and an organization's internal databases and other applications. All of these services are fully integrated in a single wireless device, with no roaming charges nationwide. Partners anticipates significant improvements to customer service from several initiatives in the past year. Direct Connect has been expanded nationally, allowing all of Partners' Nextel's customers to instantly communicate with each other using Direct Connect across the U.S. To further differentiate its services, Partners is offering a new Nextel/BlackBerry handheld device with both voice and data capabilities. CUSTOMER ACQUISITIONS. The focus on business customers has led to one of the highest average revenue-per-user numbers in the industry: $68 in 2002, vs. an industry average below $50, and its average monthly customer churn rate, or turnover, of 1.6% in 2002 was below an industry average of more than 2%. Partners' traditional methods of distribution have been through its direct and indirect sales force, and it expects to expand distribution. It planned to open 40 retail stores by yearend with at least 30 more stores expected in 2004. During the 2003 fourth quarter, Partners forecasts a decline in acquisition costs per new customer, since it would not be launching as many new retail stores and was continuing to decrease equipment subsidies and improve direct sales productivity. In each of the markets in which Partners operates, it competes with at least two established cellular licensees and with as many as six PCS licensees, including AT&T Wireless (AWE ), Cingular Wireless, Sprint PCS (PCS ), T-Mobile, and Verizon Wireless. Many existing operators have significantly greater financial and technical resources, customer bases, and name recognition. However, these five national wireless carriers are more focused on the top 100 major U.S. markets, which are separate from Partners' service territories.
BW MALL
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