(FORTUNE Magazine) – IN THE EYES OF THE PUBLIC, GENERAL Motors and Ford have been joined at the hip for decades as Rustbelt manufacturers of traditional Detroit iron. So when Standard & Poor's downgraded each of their credit ratings to junk status on the very same day, it reinforced the idea that both companies are struggling against superior competition with an outdated business model.

A closer look, however, shows that the outlook for the two companies is split. And it's GM rather than Ford that's looking stronger--a fact undoubtedly not lost on Kirk Kerkorian, who has decided to up his stake to 8.8% of GM.

Everybody knows GM's woes by now: falling market share, slumping SUV sales, mediocre models, spiraling health-care costs, negative cash flow. Its North American operations performed so badly this year that CEO Rick Wagoner moved two executives aside and placed himself in charge.

But GM may be putting the worst behind it. On the cost side, the company is riding the attrition curve. Its U.S. hourly payrolls shrank from $9.1 billion in 2002 to $8.7 billion last year. It expects to see the ranks of hourly retirees and surviving spouses start declining in 2008. Pressure is building for the UAW to replace its gold-plated benefits with some merely bronze-coated.

GM is starting to look healthier on the revenue side too. Industry sales picked up in April; meanwhile GM is combining its ailing Buick brand in the same dealerships as Pontiac and GMC, which should spark interest in both. Finally, coming later this year are some of GM's splashiest new cars since the 1959 Cadillac Eldorado Biarritz. The retro-styled Chevy HHR and slinky Pontiac Solstice have the best shot at luring customers into showrooms, while the Chevy Impala and Buick Lucerne should build sales in the giant mid-priced sedan segment. "The last batch of new models from GM landed with a thud, but the new entries look better," says marketing analyst George Peterson of AutoPacific.

Kerkorian isn't expected to call Wagoner every day with advice on how to run the company. But the 87-year-old investor hired highly regarded ex--Chrysler and IBM executive Jerry York as an advisor, effectively guaranteeing that he will use his stake to prod GM to change. According to Kerkorian's attorney and spokesman, Terry Christensen, he "sees a company with very strong assets, a global reach, a historic cash flow that is very strong, and a lot of cash on hand that can be used to solve problems." And Kerkorian doesn't have to look hard to find some noncore GM assets that can be sold--including GMAC's mortgage and insurance business and minority holdings in three Japanese automakers.

Kerkorian didn't, however, have any interest in Ford. The founding family still controls 40% of the shareholder votes, and there's also less upside. With little in its pipeline, Ford will find it tough to repeat the success it has had this year with the Mustang. Prudential analyst Mike Bruynesteyn calculates that Ford will renew only 19% of its sales volume in 2006, vs. 33% for its competitors. (Ford disputes his but won't provide its own figures.) Bruynesteyn expects GM's earnings to more than quadruple next year while Ford's go up only a fraction. Chairman Bill Ford may have had that in mind when he announced at the annual meeting in May that he won't take a salary or bonus until profits recover. Investors choosing between the two may recall the old joke about two hunters who stumble on a bear. As one hunter puts it, "I feel safe because I don't have to outrun the bear; I just have to outrun you." -- Alex Taylor III