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!
What a matchup!
This competition pits the largest telecommunications provider in the land against the grandest retailer of them all: AT&T (NYSE:T) vs. Wal-Mart (NYSE:WMT). For reasons that will soon become clear, I believe Ma Bell is too old to keep pace with the more athletic and aggressive Wal-Mart. I don't expect today's game to be a blowout, since both companies share a number of similar characteristics and investment concerns, but I don't expect it to come down to the wire, either.
Ma Bell's ill communication
Let's start with AT&T. Ma Bell certainly knows how to compete -- she once grew so powerful that the Department of Justice cried foul and broke her into multiple, less threatening Baby Bells. It took a couple of decades, but the Bell System has almost completely reconsolidated, culminating with SBC's acquisition of long-distance provider AT&T and subsequent purchase of BellSouth. Qwest (NYSE:Q) remains stuck on the West Coast, while only Verizon (NYSE:VZ), with its Bell Atlantic and GTE heritage, remains a formidable competitor with the new AT&T.
The problem with AT&T is that it's grown mostly through acquisitions, and now it's stuck with a shrinking landline telephone business and nobody sizeable left to purchase. Besides its 3.9% dividend yield, I don't see much in terms of overall growth, since it has relied on fleeting cost-cutting moves more than sales growth to help bottom-line profitability.
Quality growth, low prices
Enter Wal-Mart. Fellow Fool Nathan Parmelee recently marveled at how the big-box behemoth defies logic by continuing to post double-digit growth in sales and earnings. I mean, a company with more than $300 billion in annual sales isn't supposed to keep finding ways to add sales the size of Kohl's (NYSE:KSS) entire top line each year.
Additionally, Wal-Mart's business model is compelling in a number of international markets. A recent Wall Street Journal article detailed Wal-Mart's success in Oaxaca, Mexico, where its wages are helping push per capita income past $4,000 per year and its low pricing is stretching consumer dollars even further. It may not succeed in Japan or Germany, but emerging markets mean more years of expansion opportunities. Meanwhile, AT&T is unlikely to be able to penetrate overseas due to cumbersome local regulations and even tougher incumbent firms.
Time to phone home
Back at home, both Wal-Mart and AT&T face challenges. Wal-Mart is struggling with image problems, from allegations of providing inadequate health benefits to claims that it puts mom-and-pop stores out of business as consumers flock to its low-cost ways. It's also criticized for stretching for growth; certain investors would like to see it scale back new store openings and start to pay out additional capital to shareholders.
AT&T's problem is that nearly 60% of its business is shrinking. Plain old telephone services, or POTS, is just the pits these days, as consumers increasingly embrace wireless phones and Internet telephones courtesy of Comcast (NASDAQ:CMCSA) and Vonage (NYSE:VG). I don't know about you, but I'd take a business still capable of growing a couple of percent a year over one that will shrink on balance, meaning Cingular and other AT&T segments are unlikely to offset Ma Bell's shrinking core business.
The Foolish bottom line
So there you have it. In terms of total return, I'd be hard-pressed to conclude Ma Bell can come close to matching Wal-Mart's domestic and international prospects. I'll let you make the call before the final whistle: Does Wal-Mart deserve to move on to the next round? If you think so, simply follow this link and rank the stock "outperform" in Motley Fool CAPS. If not, vote it "underperform" and make AT&T your pick to click. Later this week, we'll tally your votes to determine which stocks will advance one step closer to the title.
Read our opposing article on AT&T, or see all the entries in the tournament.
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Wal-Mart is a Motley Fool Inside Value recommendation. AT&T is a former Stock Advisor selection.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
