DETROIT (Dow Jones)--Shares of General Motors Corp. (GM) rose nearly 6% Wednesday, leading a broad-based rally for automotive sector stocks that have been beaten down the past few months amid concerns about the health of the U.S. auto industry.

The GM share-price movement followed news that Merrill Lynch had upgraded its recommendation on the company to neutral from sell. At a time when most analysts have a bearish view on the auto maker, the report from Merrill - which said that GM is taking the early steps required for a turnaround and shoring up liquidity - could indicate that investor sentiment toward the company is turning around.

Last week GM announced that it narrowed its loss in the first quarter to $323 million from $1.3 billion a year earlier, thanks largely to an 18% jump in revenue. The earnings news came as a surprise to investors, who have been skeptical about the auto maker's ability to stem a steady loss of market share in the U.S. and rein in costs.

GM, which posted a $10.6 billion loss last year, is overhauling its North American operations with an eye toward restoring profitability in the region. As part of the plan, GM will shutter 12 facilities and shed 30,000 jobs in North America.

In a note to investors Wednesday, Merrill Lynch said GM needs to shrink its business to a defensible position, get a new labor deal and reinvest in product. "There appear to be early signs of these steps being taken," Merrill Lynch auto analyst John Murphy said. He said an aggressive move to accelerate the rate of job cuts through early retirements and buyouts could save GM about $2.3 billion in pretax cost and $1.8 billion in cash per year.

GM shares were up $1.26, or 5.9%, at $22.67 in early afternoon trading on the New York Stock Exchange. More than 10 million shares had changed hands, compared with average daily volume of approximately 12 million shares. The stock moved as high as $22.87.

Shares of GM's top competitor, Ford Motor Co. (F), were also gaining ground, up 2.4% to $7.15. Ford is also in the midst of restructuring its North American operations.

A handful of big-name suppliers were also advancing following a better-than-expected earnings report from automotive interior supplier Lear Corp. (LEA). The Southfield, Mich., supplier, whose main customers are GM and Ford, reported net income of $17.9 million, or 26 cents a share, for the first quarter, versus 23 cents a share last year. Revenue increased to $4.7 billion from $4.3 billion.

Shares of Lear of were up 9.4% at $24.08 on hefty trading volume of 3 million shares. Shares of Viston Corp. (VC), a top Ford supplier, were up 9.1% at $5.73 and American Axle & Manufacturing Holdings Inc. (AXL) gained 7.5% to $18.61.


Signs That Analyst Sentiment Is Turning

Growing optimism surrounding GM follows a long period during which the company's share price lost significant value as an increasing number of analysts tagged the company with sell ratings. Despite recent gains, the stock is well off its 52-week high of $37.70 set last July.

Merrill Lynch's Murphy applauded many of GM's recent moves to boost liquidity, which is needed to fund a North American recovery, bail out top supplier and former subsidiary Delphi Corp. (DPHIQ), and invest in new products. In recent days, analysts have pointed to GM's ability to boost revenue and the company's apparent success in delivering on cost cutting targets and other measures as positive indicators.

"We believe that ongoing year-over-year improvement in GM North American operations should accelerate as we progress though 2006 and, coupled with conclusion of the Delphi labor dispute, lead to a strong positive reaction in the company's stock price over time," Calyon auto analyst Joseph Amaturo noted on Friday, a day after GM reported first-quarter earnings. Amaturo has been a rare bull on GM, maintaining a $35 price target and a buy rating. Currently, only three analysts of 18 polled by Thomson First Call issue a buy rating on GM.

The company unwound its Japanese alliances in recent quarters, gaining more than $3 billion in return, and halved its dividend. Most recently, the auto maker sold a 51% stake in its prized General Motors Acceptance Corp. lending arm, and the move is expected to net $14 billion over the next three years.

Murphy also pointed out that the company's retiree benefits and pension obligations - long cited as a mammoth disadvantage for GM - are being well managed. "GM should be able to increase the retiree base quite substantially without impairing the plan," Murphy said, noting that the U.S. plan is well-funded.

GM spokeswoman Toni Simonetti said the company is encouraged by the recognition that GM is making progress on its restructuring. While Murphy's note suggested GM may "leverage the assets" in its pension and retiree benefit reserves to fund its restructuring plan, the auto maker has not indicated that is an option.

"We do have a well-funded U.S. pension plan," Simonetti said. However, "we're trying to fund the turnaround through liquidity." She said funding for the company's pension and retiree benefit obligations are "strictly" for beneficiaries of the plan.