(Almost) All's Well With Nextel

Investors seem to have a thing against Nextel (NXTL).

Its stock has dropped 26% since the beginning of July, compared with AT&T Wireless' (AWE) 4% slide and Sprint PCS' (PCS) 3% gain over the same period. Not that Nextel's second-quarter results gave the Street a reason for animosity -- in fact, Nextel added $1 to its sector-skunking per-user spending figures. While rural service provider Alltel (AT) garners about $47 per user and AT&T Wireless gets about $64 a pop, Nextel enjoys the advantage with $72 spent each month, on average, by its users. Bottom line? There's nothing in the past two months that should've soured the market on Nextel.

The wireless giant posted improvements in all the important metrics in the second quarter, raising its earnings before interest, taxes, depreciation and amortization from $318 million to $483 million sequentially, and reducing its churn rate to 2.3%. It also reduced the amount it spends to gain new customers from $475 to $430 apiece. And all this in a quarter that was supposed to be crummy because of slowed corporate spending due to the economic slowdown. Naysayers now expect Nextel to bend to the forces of corporate cash conservation in the third quarter, but all the same pressures were in place in the second quarter, when Nextel turned in $1.9 billion in operating cash flow.

Overall, Nextel is making good on the late-1990s communications dream of consolidating corporate customers across the nation into one, wanton base of consumers who have the luxury of expensing their phone bills. Who wouldn't love to cherry-pick the 8.95 million corporate mobile-phone callers -- 20% of whom already subscribe to data -- who help out the bottom line with both their lower churn and higher revenue-per-month characteristics?

But investor drooling turns to rabid froth when it comes to the risky way the company has managed its balance sheets. Like its cousins, the competitive local exchange carriers, Nextel acquired mountains of debt back when the stock market was embracing high-potential, highly leveraged issues.

Nextel currently has $16 billion in long-term debt to its $24 billion in assets, compared with AT&T Wireless' $14.4 billion in long-term debt and $43 billion in assets, or rural-focused Alltel's $4.1 billion in long-term debt and $12.3 billion in assets (Nextel did announce, though, on Monday that it was retiring $857 million in debt in return for 21.6 million Nextel shares).

Nextel overdid the financing, giving investors a perpetual source of worry, but unlike its cousins who were evicted to Chapter 11, Nextel has managed to maintain its quality performance. At the end of the second quarter, Nextel CFO John Brittain said the company had $6 billion in "available funds" -- $4.5 billion in cash and $1.5 billion in bank commitments -- halfway through a year in which it plans to spend $2.5 billion.

Investors have, however, been jittery that that $2.5 billion might balloon to much more than that in 2002 and beyond as Nextel begins to get its networks ready for third-generation (3G) wireless services. Nextel is expected in late 2002 to overlay 1xRTT, code division multiple access technology on top of the existing Motorola-based iDEN, or integrated digital enhanced network, technology, a move that investors worry could break the bank. But according to an analysis by UBS Warburg, building out Nextel's cell sites -- if Nextel decides to make that move -- would cost less than $3 billion, "much lower than the $4 billion to $6 billion figures being touted."

All this is not to say that Nextel doesn't need to work on its balance sheet, but its problems there are not as bad as they could be. Looking at the company from the standpoint of its quarterly earnings metrics, Nextel's doing just fine.

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