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General Motors Fueled Up

The automaker's earnings report should show strong momentum, contrasting Ford's woes.
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These days, record highs on the

Dow Jones Industrial Average

are the toast of Wall Street, but where would the blue-chip index be this year without

General Motors

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?

Shares of the world's largest automaker have been far and away the biggest gainers on the Dow in 2006, with a monstrous 85% increase. GM appears to have been a value play after a rough 2005, which resulted in a 48% drop in its stock price and led to warnings of labor strikes and bankruptcy that now look overblown.

Where the slumping company used to be a burden on the Dow, visions of a successful turnaround at GM has helped the closely watched index to a 12% gain so far this year and new highs that were six years in the making. Now GM is expected to report a third-quarter operating profit on Wednesday that will keep the momentum running and draw a bright contrast to the continued stumbles at its rival,

Ford

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.

Since Ford, the No. 2 U.S. automaker, reported its

biggest quarterly loss since 1992 on Monday, shares of GM have climbed 4.6% as investors bet it would pick up the slack.

"There's an expectation out there that things are going to be better for GM," says Morningstar analyst John Novak. "The executives have been confident in their comments lately. The results will look good certainly in comparison to last year's performance and Ford. It will show that their turnaround is on track."

Wall Street analysts, on average, expect GM to report a third-quarter profit of 49 cents a share, before restructuring costs, according to Thomson First Call. That compares with the loss of $1.92 a share it recorded for last year's third quarter on the same basis. Ford, meanwhile, reported a loss before charges of $1.2 billion, or 62 cents a share.

GM has mainly differentiated itself from Ford on Wall Street with the pace of its restructuring efforts, which cranked up in earnest this year after activist investor Kirk Kerkorian installed a representative from his firm, Tracinda Corp., on the company's board of directors.

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Kerkorian's man at GM, Jerry York, has since resigned his board seat after its CEO, Rick Wagoner, pulled the plug on negotiations with

Renault-Nissan

about a global alliance that Kerkorian had supported. But in his tenure, York prompted the automaker to slash its dividend, shutter plants, sell a number of assets and execute a massive employee buyout that was largely accepted by workers.

These actions lit a fire under the company's downtrodden stock as investors realized the automaker was finally getting realistic about the scope of its problems. Ultimately, the dramatic turnaround in the company's stock price gave Wagoner and his turnaround efforts the credibility to shoot down Tracinda's support of a global alliance, which would have been a direct challenge to Wagoner's stewardship of the company.

While GM has made great strides in cutting costs, its sales remain under pressure amid competition from Asian-based rivals like

Toyota

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. Detroit's so-called Big Three automakers have suffered a steady erosion of market share in recent years in the key North American market as consumers have increasingly turned to the smaller, more fuel-efficient vehicles that are usually offered by the competition.

Novak says GM has managed to make some progress on the sales side of its business.

"GM is in a sweet spot of their new product cycle, and they're looking better positioned than Ford on that front," Novak says. "They've been doing well globally, as well, in places like China. They've also managed to raise prices on their vehicles, and that's going to help their situation this year."

In his recent resignation letter to GM's board, York conceded that GM's sales troubles have alleviated some in the midst of the company's "sweet spot" for its product cycle, but he said its market share in North America remains in decline.

"I have grave reservations concerning the ability of the company's current business model to successfully compete in the marketplace with those of the Asian producers," York said.

However temporary GM's recent successes may be, there are few signs that the company will lose its momentum this year. Burnham Securities analyst David Healy said in a recent note to clients that in its fourth quarter, "GM will benefit sequentially from higher production and from the full effect of the headcount reductions."

Healy predicts fourth-quarter earnings of $2.10 a share, before charges, while First Call reports that consensus estimates for the final quarter of the year are at $1.01 a share.

Talk of labor strife at GM's bankrupt supplier and former subsidiary,

Delphi

, has died down for now, and the automaker is not expected to pick any battles with organized labor until major contract negotiations begin next year.

Healy says GM is executing a turnaround that should be the envy of Ford.

"Simply put, GM lost nearly $1,400 per vehicle in North America in 2005, chiefly because of Americans' sudden aversion for large SUVs," he said. "In our opinion, GM will come close to breaking even on that same basis in the current year and could be profitable to the tune of $700 per North American vehicle in 2007."

If that prediction holds true, then the latest record highs on the Dow are likely just the beginning. If not, GM's board likely

hasn't heard the last from Kirk Kerkorian.