GE gains on break-up theory; Applebee's rises; Universal Power retreats; Delta Air slides

By Ronda Fears

Memphis, April 27 - Behemoth General Electric Co. got a big bounce Friday from a research note out of Citigroup suggesting the giant conglomerate consider a break-up. Traders said it was not a new theory and had caused a similar spike in the stock a month or so ago; thus, there was a fair amount of profit taking.

Otherwise, traders said that despite strength in the Dow Jones Industrial Average that sent the index to another record high, players were not buying many special situation names going into the weekend. Instead, those that went on the auction block during the week were little changed, versus big gains seen in such cases over a string of previous Fridays.

"I think maybe there was some hesitation to be long over the weekend in some of these [special situations equities] on concern that there could be a big drop in the broader markets after the strength we saw this week," one trader remarked.

Wendy's International Inc. was slightly lower while Chaparral Steel Co. was a tad higher, for example. Wendy's (NYSE: WEN) was off 33 cents to $37.66; Chaparral (Nasdaq: CHAP) added a penny to $69.39.

Many companies that have gone on the auction block in recent weeks were lower as well, such as independent power producer Mirant Corp. (NYSE: MIR), which slipped 9 cents to $44.73. The Mirant warrants moved similarly lower.

Applebee's International Inc., however, was seeing buyers jump in the wake of the restaurant chain's revelation of nibbles from four interested parties that may result in an official buyout offer.

One trader said Friday that he was hearing the best bid was in the neighborhood of $33 per share, but on Thursday another trader said he was hearing the restaurant chain could sell for $37 to $45 in a buyout scenario. A third, a risk arbitrageur, said he was set up on call spreads with a short position in the stock to make money so long as the price tag is at least $35. Applebee's (Nasdaq: APPB) advanced Friday by 81.5 cents, or 3.03%, to $27.745.

Sentiment was deflated in the new Delta Air Lines Inc. common stock, as well, with a big drop in the when-issued shares on Friday after starting below expectations the day before.

GE breakup concept aired

In a research note Friday, Citigroup analysts said GE should sell some of its units - NBC Universal, GE Money and its real estate businesses - to focus on infrastructure, asserting that could boost shares by 26%.

One trader said he does not expect GE to entertain the break-up concept, which he also does not think is a panacea for the stock's lag in contrast to the broader market. But he said the research note forced the topic, which has been background noise in GE for over a month, into the public spotlight.

He said there were lots of traders taking profits on the spike in GE on Friday, however. GE (NYSE: GE) advanced $1, or 2.79%, to settle at $36.84 after trading as high as $37.22 in the session.

The Citi analysts noted that GE shares are down 3.7% in 2007 while those of rival Tyco, which plans to split into three separate companies, are up 7%. Tyco's breakup has been expected for many months and it is forecast to be complete by midyear; that stock (NYSE: TYC) added 12 cents to $32.64 on Friday.

"I do not believe in the pat answer that developing shareholder value means that a company should be broken up. Sometimes it helps. Sometimes it is a total failure," the trader commented.

"GE is one of the long-term old success stories, which is based upon GE continually reinventing itself - getting into new areas, developing and expanding promising companies and selling off the old buggy whips, etc. Some of that competitive edge was due to the many industries under GE's control while encouraging its employees to act like individual businessmen with original ideas.

"You would lose a lot of that if you broke GE up."

Another market source said he thinks a breakup might be a worthy concept for GE to explore, but he remains a fan of GE and would add to his position even with the rise seen Friday.

"A lot of discussion about why GE languishes focus on two things - that it has a huge financing arm and is thus nothing more than an exaggerated bank and banks have low PEs traditionally, and that it has a huge market cap and thus requires billions of dollars of investment capital to move its share price," he remarked.

"My answers, which are not forecasts, but just answers, have always been that EPS growth is EPS growth, and GE has high quality EPS growth. It uses its financing arm to extend trade and other credits to its buyers. I think that is more reliable earnings than what banks have. Big cap versus small cap go in and out of favor. Right now everyone from Motley Fool to Investors Daily sings the song of small cap companies. Heck, I have some in my portfolio, too. But when big caps come back in favor, it'll be too late to buy GE. I am big on cash flow multiples, and GE is selling at a big discount to its traditional cash flow multiple."

Delta slides in oil price jitters

After getting off to a slow start the day before, it got even worse for Delta Air Lines when-issued shares on Friday as oil prices spiked after Saudi Arabia announced the arrests of 172 Islamic militants suspected of planning to attack their oil fields.

Delta when-issued shares (Pink Sheets: DALIV) were said to have closed Friday at $20.91, down $1.89, or 8.29%, from a $22.80 close on Thursday.

Higher oil, which obviously translates into higher fuel prices for airlines, is a chink in Delta's exit from bankruptcy, as one trader sees it. Another, he said, is that the company was essentially forced to get its reorganization plan railroaded through earlier than planned because it was being dogged by US Airways Group Inc.

Crude oil for June delivery advanced by $1.40 to $66.46 a barrel on the New York Mercantile Exchange on Friday.

"There couldn't be a worse time to try to figure out an oil hedge," the trader said.

Originally, Delta had planned to exit bankruptcy around midyear, but the hostile takeover bid from US Air that Delta vehemently fought gave it impetus to get a reorganization plan together faster in order to exit the bankruptcy process, as this trader sees it.

If Delta could have waited until midyear, or August when the summer travel season was over, that would seem to be better for them in terms of the oil price scenario, the trader said. He said it would have been ideal if Delta could have pushed its bankruptcy emergence past the presidential election in November.

Moreover, though, this trader feels Delta should have taken a merger with US Air.

"These guys were stupid for not taking the US Airways deal," he remarked.

"It not only was good for the company [Delta] but good for the industry. Multiples would improve so much with that; there would have been $1.3 billion in savings in the US Air deal. The legacy carriers are so competitive, though, and it came down to the greedy management at Delta didn't want to lose their jobs."

Northwest deal still hovering

As for market chatter that Delta has or is entertaining a merger with Northwest Airlines Corp., another major carrier in bankruptcy, the trader said that could get off the ground, once Northwest has exited bankruptcy as well.

Owl Creek Management, a big stockholder in Northwest, has pushed for such a union, and market chatter pegs a deal between the two by year-end.

"They [Delta and Northwest] have denied any merger talks but it would make sense, any consolidation in the industry would make sense right now," he said.

"I think it would have been easier to get done, or easier to get done in a way that would better ensure a successful company coming out of the merger, in bankruptcy court. Otherwise, you're back to having to deal with all the greed."

But there has not been much progress in attempts to force the issue in bankruptcy court so far, he said. There had been some hope of a distribution to Northwest stockholders, but that evaporated when the $1.3 billion was redirected to unsecured claims, or bondholders, he said. An ad hoc committee of Northwest stockholders is still involved in the bankruptcy case.

Northwest shares (Pink Sheets: NWACQ) settled off 2 cents at 33 cents on Friday; before the official equity committee was disbanded earlier this year, the stock had run up to $7.50.

Northwest Airlines still expects to emerge bankruptcy around midyear.

Discovery Labs bounces

Discovery Laboratories Inc. also got a bounce Friday on an upgrade from Jefferies & Co., which a company spokeswoman said is still conducting an exercise to explore strategic alternatives - a process that began almost a year ago.

The stock (Nasdaq: DSCO) gained 13 cents, or 4.67%, to $2.89.

Jefferies analyst Adam Walsh said in a report Friday that the company has made significant progress on addressing Surfaxin-related manufacturing issues. Based on potential Surfaxin approval within 12 months, the near-term launch of Aerosurf clinical trials, an improved balance sheet, and an enterprise value of just $250 million, he said the stock was attractive current levels.

Discovery Labs has said it expects a six-month Food and Drug Administration review period for Surfaxin, which would peg approval around March or April 2008.

A year ago, the company was routed after the FDA raised manufacturing issues as an obstacle to getting approval for Surfaxin - a drug to treat respiratory conditions in premature infants. Two months later, the company hired Jefferies to explore strategic alternatives. Nothing has yet transpired, but company spokeswoman Lisa Caperelli said Friday that the exercise is still ongoing.

A trader away from Jefferies said the technicals looked "awesome" on Discovery Labs.

"I wouldn't want to be short here because the trend has turned," he said. The trader said once Surfaxin gets full FDA approval there could be something transpire on the strategic alternative front.

Jefferies' Walsh upgraded the stock to buy from hold and boosted his price target to $5 from $3. Jefferies also was lead placement agent for Discovery Labs' recent $30 million registered direct offering.

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