By Ronda Fears
Nashville, Tenn., Oct. 22 - Seeing Nextel Communications Inc. on the cusp of turning into positive territory with regard to cash flow, Wachovia Securities, Inc. analysts are recommending the convertibles ahead of its release of third quarter results on Thursday.
The analysts also note that Nextel has been buying back converts and is likely to continue. And they do not see the company tapping the convertible market further.
"We not only believe Nextel will be a survivor but also that the credit quality improves over time and the stock moves toward our $12 target," said analysts Jeanine Oburchay and Brian Park in a report Tuesday.
"We believe conservative outright investors should buy the 4.75% and outright investors who are confident about the credit should focus on the 6%, or buy both. The company reports on Oct. 24, and we are looking for an upside surprise regarding the buybacks of the company's debt."
Nextel continues to defy the critics who steadfastly remain in the "going into bankruptcy" camp, the analysts said, noting the company focuses primarily on the business customer, which no other wireless provider has done as successfully.
Nextel's strategy has been to take market share from competitors, the analysts said, and has consistently added more than its share in late quarters.
In the second quarter of 2002, the company not only beat expectations but also increased forward guidance.
"For the full year, we believe Nextel will do what it says it is going to do: meet or beat expectations of EBITDA exceeding $3 billion this year and subs better than 2 million. In fact, Nextel will likely well exceed the $3 billion EBITDA target," the analysts said.
"We also expect, with higher EBITDA, Nextel's coverage ratios to hold steady at 2.9x through year-end, improving to 3.7x by the end of 2003."
Nextel has been criticized for having too much debt, but the analysts said the reality is that Nextel is not as levered as Sprint PCS. On an annualized basis, Nextel's debt/EBITDA at the end of the second quarter was 4.4x. Sprint PCS, however, posted debt/annualized EBITDA of 5.3x.
"Nextel does not need new capital, and we believe the company will not use the capital markets to delever the balance sheet," the analysts said.
"When recently questioned about selling mandatory securities or equity to pay down debt, management was adamant that it would not do that."
However, the analysts said they came away from discussions with management believing Nextel was still planning to continue buying back debt below par.
As of the most recent quarter, Nextel has bank facilities totaling $6.0 billion, of which $4.5 billion is already drawn and $1.5 billion remains available. The company also has straight debt totaling $5.4 billion and convertible debt of $2.3 billion.
"We believe Nextel will continue to buy back debt and converts. Management wants a much less levered balance sheet, and we believe the company can successfully grow into that balance sheet," the analysts said.
"We think management has decided that lowering its debt in absolute dollars is a prudent course of action, especially when it is trading well below par."
The analysts believe the right credit spread for Nextel is currently 1,000 basis points. However, because Nextel is perceived as a risky credit story, any movement in the stock has historically been linked to a movement in the credit spread.
As a result, when analyzing the upside/downside participation of each convert, the analysts assume that if Nextel shares went to the $12 range the credit would tighten 100 basis points to 900.
Conversely, should the stock fall to the $2 range as it did in July, the credit spread would widen to about 1,200 basis points.
Using these assumptions and assuming roughly 50% volatility, the analysts said the 4.75% bonds would participate in 68% of the upside and 13% of the downside movement.
The 5.25% would participate 73% to the upside and 10% to the downside.
The 6%, which are the most equity sensitive of the three, would participate 91% to the upside and 26% to the downside.
Nextel 4.75% convertible due 2007
| Price: | 79
|
| Stock price: | $9.98
|
| Conversion premium: | 104.9%
|
| Conversion ratio: | 42.28
|
| Conversion price: | $23.654
|
| Current yield: | 6.0%
|
| Yield to maturity: | 10.5%
|
| Call: | July 2003 at 102.714
|
| Credit ratings: | B3/B+
|
|
|
| Nextel 5.25% convertible due 2010
|
| Price: | 66
|
| Stock price: | $9.98
|
| Conversion premium: | 440.8%
|
| Conversion ratio: | 13.4
|
| Conversion price: | $74.40
|
| Current yield: | 7.9%
|
| Yield to maturity: | 12.4%
|
| Call: | January 2002 at 103.5
|
| Credit Ratings: | B3/B+
|
|
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| Nextel 6.0% convertible due 2011
|
| Price: | 76
|
| Stock price: | $9.98
|
| Conversion premium: | 98.2%
|
| Conversion ratio: | 41.96
|
| Conversion price: | $23.838
|
| Current yield: | 7.89%
|
| Yield to maturity: | 10.3%
|
| Call: | June 2004 at 104
|
| Credit ratings: | B3/B+
|
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