Altria vs. AT&T: AT&T

In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!

In the opening round of this Stock Madness tournament, I showed that although AT&T (NYSE: T) may be a familiar name, the new Ma Bell plays ball less like grandma and more like Grandmama. I expect that round two will show the same.

My second-round opponent, the big MO -- otherwise known as Altria (NYSE: MO) -- is a tough one. Though the two companies share some similarities, it's easy for me to see why AT&T deserves a third-round berth.

Playing the transition game
As the Greek philosopher Heraclitus said, "Nothing endures but change." This has definitely been the case for these two 100-plus-year-old companies.

In 2005, AT&T was bought out by one of the Baby Bells, SBC, and the combined company opted to continue doing business under the name AT&T. This new company went on to buy out another Baby Bell, BellSouth, in 2006. What was once the moniker of a sleepy POTS (plain old telephone service) company is now the name of a massive global communications powerhouse.

Under the new and improved AT&T brand, consumers can find the 21st-century communications services that are powering the most exciting new applications. These include cellular service under the Cingular brand, DSL Internet, voice-over-IP (VoIP), satellite television, and even TV-over-Internet protocol (IPTV).

Altria is going through a somewhat similar process of transforming the business. After combining the acquisitions of Kraft and General Foods in 1989, Altria continued to build the subsidiary through acquisitions. At the end of this month, though, Altria will complete the spinoff of Kraft and will have brought the company full circle to its original focus: tobacco. Rumors late last week even have Altria possibly getting ready to make a bid to acquire another tobacco company.

Nailing the easy lay-ups
Another similarity between the two companies is that both have businesses that lend themselves to recurring revenue. For AT&T, its communications services are used on an ongoing basis and, as subscribers know, if you want to continue to have Internet access, you'd better make sure that your bill is paid each and every month. This recurring revenue not only makes projecting the next quarter and next year easier, but it also makes for easier and more effective business planning.

AT&T also benefits from the stickiness of its products. There are competing products and substitutes available, but customers tend to stick with a service provider once they get the service installed.

Altria may not sell subscription services, but it has something similar: an addictive chemical. The addictive nature of the nicotine in tobacco makes the tobacco-peddling business fairly predictable. Customers not only make relatively predictable repeat purchases, but most also tend to be very brand-loyal.

The cross-over, drive-the-lane, two-hand slam
Past the similarities, AT&T and Altria remain very different businesses. AT&T is selling services that enhance and facilitate global communications, while Altria is selling a product that has the potential to kill its customers (as well as those who happen to be sitting near them) and is entrenched in constant political warfare. At this point, tobacco companies can't advertise, they have to put danger warnings on their products, their products are being banned all over the place, and the companies themselves are spending money to educate people about the danger of their own products!

Investing isn't necessarily a "feel good" question. There is definitely a trend toward "socially responsible investing" out there, but for many, it's still a question of which business will produce better returns over time. Call me crazy, but I see more of a future with the company helping to revolutionize communications than with the one that has a political anaconda slowly trying to choke off its business.

So, do you think AT&T should smite the big MO and move onto round three of the Stock Madness tourney? Just follow this link and rank the stock "outperform" in Motley Fool CAPS. Or, if you think MO's smoke chokes off Ma Bell, vote it "underperform." Later this week, we'll tally your votes and decide which stocks advance closer to the title.

Read our opposing article on Altria, or see all of the other entries in this tournament.

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AT&T is a former Stock Advisor pick.Fool contributor Matt Koppenheffer is a fan of Larry Johnson, but he knows there's only one true Grandmama. He does not own shares of any of the companies mentioned. The Fool's disclosure policy jams it with authority.