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Nextel Fans Chafe at Upgrade Tab

Strong growth hasn't been able to sustain the stock, as investors await a big network expansion bill.

After getting booted into the cellar last month, Nextel (NXTL) is crawling back into Wall Street's good graces.

As you may recall, the walkie-talkie pusher last month posted

solid quarterly numbers, but that didn't keep tech types from harping on looming questions. Foremost among those: How hard will earnings be hit by the expiration of tax credits? And how big a bill will come due for a series of crucial technology upgrades?

Now, though those matters are far from resolved, it appears that at least some investors are feeling they may have been a little rough on the Reston, Va., cell-phone service giant. After falling more than 12% in the weeks following the earnings report, Nextel shares have recovered some lost ground. The stock is now 6% above its Aug. 9 low, closing Friday at $23.05.

Nextel bulls like to run through a list of reasons they have a rediscovered their enthusiasm for the stock. For one, Nextel has grown in the past two years from a deeply distressed technology play to the leader of the wireless pack, along with

Verizon Wireless

. Nextel, a favorite of business users, boasts the highest revenue per user along with one of the lowest defection rates. The company continues to grow on the top and bottom lines.

It also doesn't hurt that Nextel is the only pure wireless stock in town.

Sprint PCS

got folded back into its parent,




AT&T Wireless


is due to be snapped up by

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, after which its name may resurface in some future


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Meanwhile, the two biggest players in the U.S. wireless industry, Verizon Wireless and Cingular, are hard to invest in because they're part of slow-growing telco titans: Cingular is a venture of






, and Verizon Wireless is split between Verizon and


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There's more, of course.



, Nextel's exclusive phone supplier, is rolling out sleeker color-screen, camera-equipped models to replace the bulky lineup subscribers are currently carrying around. This should help the company fare better in more fashion-conscious circles.

Nextel is also pushing into new markets like the more blue-collar NASCAR crowd, as well as trying to appeal to teen-agers with its Boost prepaid service. Also, with the pending $41 billion buyout of AT&T Wireless by Cingular, some observers say there may be a new crop of customers looking for a chance to flee AT&T Wireless, the nation's worst-rated service, for greener airwaves.

Nextel rally peters out

All that said, nothing Nextel is doing is likely to result in a repeat of its head-turning market success of the last couple years. The stock rose more than 10-fold between June of 2002 and the end of 2003, but it has been slipping through the 20s ever since.

That lack of traction has been accompanied by an increasing tendency on Wall Street to look at the finer points of Nextel's prospects. Even though the company has blown the doors off profit and cash-flow targets several times this year, the focus has increasingly moved to the future.

One issue that got a few analysts' attention was tax rates. Now that Nextel has profits, the company says it expects to run out of tax credits by midyear 2006. Analysts initially assumed a 39% tax rate, and quickly slashed their estimates.

But some observers say that while the 39% rate may be a fair assumption, the tax bill may not be as big as initially expected. Nextel likely will be increasing its network investments by $1 billion or more in the coming years as it moves to new technology. This higher capital expenditure will effectively lower Nextel's tax bill as the company factors in the standard depreciations.

Tech upgrades, meanwhile, present another puzzle.

Nextel critics have pointed to the hefty tab ahead, as the walkie-talkie specialist tries to add fast Internet access to its network services. The company is in the hunt for the best, lowest-cost solution and is trying out gear from a closely held New Jersey tech outfit called Flarion.

Though bears see the move as a potential money swamp, the optimists see a whole new group of laptop subscribers potentially jumping into the revenue stream. If successful, Nextel could get early returns on its data investment, bulls say.

That said, other questions remain. How much, for instance, will it cost Nextel to vacate its spectrum used by emergency services for new radio waves in the 1.9 megahertz band? The company won a seeming victory over rivals, including


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, a few months back by securing government support for its plan, but even that advance didn't restart the stock.

Investors don't like surprises, and some have said they are willing to wait to dip their toes in until the costs surrounding the spectrum swap and Internet upgrades are better known. If that's the case, it may be a while before Nextel is able to get out of the dark.