Wachovia analyst suggests outrights switch into Nextel 5.25s from 4.75s

By Ronda Fears

Nashville, Dec. 16 - Wachovia Securities, Inc. convertible analyst Jeanine Oburchay said Nextel Communications Inc. convertibles are still attractive but a switch is in order.

With Nextel common stock at $12.50, the 4.75% convertible is at 86.75, the 5.25% convert at 71.50 and the 6% convert at 88.75.

"We believe now is the time for conservative outright investors to swap out of the 4.75% bonds and into the lower dollar cost, higher current yield 5.25% bonds," which have the highest current yield at 7.3% and a yield to maturity of 11.1%," she said in a report Monday.

The hard-call protection has already expired on the 4.75% issue, whereas the call protection on the 5.25s expires in January 2003 and the 6% convertibles have some 18 months of remaining call protection, she added.

"We believe these bonds [5.25%] on a total return basis will not decline given the current yield," Oburchay said.

"We also believe the 6% makes a solid investment for outright investors who are more confident about the story and the credit, and who are not averse to holding paper for an additional four years."

Nextel announced early Monday that it has signed a two-year government contract with the U.S. General Services Administration for an estimated $200 million incremental revenue per year.

Nextel's strategic plan has been to target government accounts, where wireless spending totaled more than $2 billion in 2001, growing at 19% annually, she noted.

"This contract is further evidence of Nextel successfully implementing its plan," Oburchay said.

"We believe Nextel will continue to successfully penetrate government accounts, and believe this latest announcement supports our thesis that Nextel will benefit from government and safety agency communications spending.

"We do not believe this award will have any effect on the FCC's decision of whether to grant Nextel its proposed spectrum swap, which we believe will happen, but look forward to more news on that swap in spring 2003."

Oburchay said investors should still buy Nextel and maintains a $19 12-month target price on the stock, based on a discounted cash flow model using a 14% discount rate and 8x terminal multiple.

"Risks to our target price include headline risk, market perception and the possibility of poor fundamental performance that could prevent Nextel from reaching that valuation," Oburchay noted.

Nextel's 9.375% senior notes due 2009 are bid around $91.25, or Treasuries plus 789 basis points, but Oburchay believes the right credit spread is 840 basis points, where it moved from 1,000 basis points a few months ago, as the company has been aggressively delevering.

"Because Nextel has historically been perceived as a risky credit story, any movement in the stock has been linked to a movement in the credit spread," she said.

"For this valuation purpose, we tightened the credit spread to 800 bps, which we believe could prove conservative in 12 months, as the company likely buys back more debt and the fundamentals continue to improve."

She continues to use a volatility assumption of 70, as January 2005 $20 strike calls are currently bid at a 71.4 volatility.

"We believe the volatility will come in as and when the stock moves closer to our price target, although the perceived and realized improvement in credit quality will likely offset lower volatility," Oburchay said.

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