The acquisition of two respectable companies and a slight improvement in restaurant sales have several analysts yammering about a turnaround at

Apple South

(APSO)

, the largest franchisee of

Applebee's Neighborhood Grill and Bar

.

On the surface, this apple looks rosy. Though shares skidded 45% on Sept. 24 when Apple South announced faltering earnings -- 30 cents a share for the year, compared with 52 cents in the previous year -- the stock has since risen to 13 from its 52-week low of 11 3/8 on Nov. 1.

But the fruit might not yet be ripe.

Critics contend that two acquisitions, announced the first week of February, have set Apple South on the kind of diversification course that has caused many other companies to stumble. And while sales at Apple South's 235 Applebee's restaurants have inched back from their 6.2% decline in June, the call for a turnaround may be premature. Adding to the uncertainty is a new, unproven management team.

Some analysts applaud the planned purchases of

McCormick & Schmick

, which operates 16 upscale seafood restaurants, and

Hops Grill & Bar

, which owns 18 casual dinner houses. David Trossman, analyst with

Alex. Brown

in Baltimore, says Apple South got a good deal paying $84.5 million for the two companies, a price that reflects less than 1.5 times annual sales. Trossman initiated coverage of Apple South with a strong buy three weeks ago. His firm hasn't done underwriting for Apple South.

Similarly, Michael Fineman, an analyst with

Raymond James

in St. Petersburg, Fla., boosted his rating to a buy about a month ago. Fineman, whose firm has done underwriting work for Apple South, says recent acquisitions give the company a second and third concept -- a key element to growth.

But often second or third concepts become the rotten apple that spoils the bunch. Wall Street frequently encourages restaurant companies to grow by diversifying, only to become disillusioned when the unwieldy conglomerate becomes a management nightmare.

The stench of troubled restaurant conglomerates is souring the current landscape.

Brinker International

(EAT) - Get Report

,

Quality Dining

(QDIN)

and

PepsiCo

(PEP) - Get Report

are just a few that have tripped recently on the diversification trail. Loss of focus, and infighting over capital and real estate, are just some of the problems companies face as they manage various brands.

But Apple South Chairman and Chief Executive Tom DuPree Jr., driven by what some industry insiders say is an indomitable ego, intends to buck history.

"We'll be unique to the industry," says company spokeswoman Dianne Yost, explaining that all divisions will be run independently with the current management and culture kept intact.

Yet, that strategy is similar to the one that has tangled Brinker.

"They may say they're unique, but they're not," says Craig Weichman, an analyst with

Morgan Keegan

, the Memphis firm that brought Apple South public in 1991. He's maintained a hold rating since September.

Indeed, even Trossman, a staunch supporter of Apple South's strategy, is hard pressed to find an example that's worked. "It's fair to say that we have more problem models than success models for diversification," he says.

To be sure, Apple South has had some decent results with past acquisitions. It bought

DF&R Restaurants

in 1995, which included the purchase of

Don Pablo's

. The 63-unit Mexican chain was Apple's best-performing unit in 1996. But purchases of the

Hardee's

and

Tomato Rumba

units have had rougher results. The company has since sold or closed those divisions.

"They have too much on their plate," Weichman says of the current purchases.

With more divisions to fund, capital allotment may prove troublesome.

"There's the possibility that they'll choke capital from one segment," Weichman says. Apple South is registering for a private placement of $100 million in convertible preferred trust securities to finance the acquisitions and pay down the company's revolving credit facilities.

Moody's

rates the debt Ba2 and describes the outlook as negative, based on, among other factors, the company's aggressive expansion plans and its leveraged balance sheet.

All this comes as Apple South has been struggling to turn sales around at its flagship Applebee's chain. Yost says problems mounted in 1995 when excessive management turnover eroded customer service. The company has since hired 11 multiunit managers and scaled back its opening schedule. In 1997 it will open 34 Applebee's as opposed to the 52 units it planned to launch.

December average store sales were down 3.4%, better than the June loss, but not exactly cause for celebration.

And there's uncertainty about whether the company can continue to improve sales under new management. Kirk Kinsell was named president and chief operating officer of Apple South in January, following the resignation of Michael Evans in July. While he has a long history in the hotel business, he has limited restaurant experience. Jay Gillespie, a restaurant veteran, filled the post of president of the Applebee's division, which was vacated by Debbie Passmore in January.

With so many questions as yet unanswered, investors would be wise to leave this apple stewing for now.

By Suzanne Kapner

skapner@thestreet.com