Glad tidings in Ford’s bad news

July 26, 2012, 7:36 PM UTC

By Doron Levin, contributor

FORTUNE — Ford Motor Co. second-quarter profit, down by more than half from a year ago, contained a ray or two of hope for investors and a splash of cold water for anyone who hasn’t yet grasped the depth of Europe’s economic woes.

Ford’s (F) $1 billion net income for the period ended June 30, announced early Wednesday, compared with $2.4 billion a year ago. The drop largely reflected a $404 million loss posted in Ford’s European operations. South America more or less broke even, and Asia-Pacific posted a small loss.

Ford’s North American operations and its finance subsidiary carried the company, an excellent result in a market where economic growth remains weak and the vehicle market hasn’t recovered to pre-crash levels. “Certainly, it seems like the worst is still ahead of the industry in Europe and South America,” wrote Peter Nesvold, Jefferies Group Inc. equity analyst. But he added “Ford actually looks on top of the situation” since there were no surprises in the latest earnings release.

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John Murphy, equity analyst for Bank of America’s Merrill Lynch brokerage unit, highlighted Ford’s “five-year track record of price discipline,” as well as an impressive parade of new models and refreshed versions of older models. Merrill and Jefferies rate Ford shares a “buy,” while Morgan Stanley gives Ford stock the rough equivalent of a buy, which it calls “overweight.”

Ford shares have been beaten below $9 a share, about half their price at the beginning of 2011. The miracle of Alan Mulally’s turnaround, which started in 2008, has given way to recognition that the global economy is facing one debt crisis after another, such as the one that seized General Motors (GM) and Chrysler in 2009, forcing them into bankruptcy.

Thanks to U.S. Treasury restructuring, Chrysler now is dominated by Fiat, which owns 62% of the Auburn Hills, Michigan automaker and is plagued with inefficiencies. GM has also contended with losses in Europe, about $14 billion over the past 12 years. Ford’s results haven’t been as awful; but the current bleeding, with losses estimated to reach $1 billion this year, will continue to weigh on the company’s stock.

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Ford’s chief financial officer Bob Shanks has hinted that the difficulties in Europe are about overcapacity rather than a cyclical downturn in the European economy. Broadly translated, Shanks’s opinion means Ford is considering the same sort of painful and expensive plant shutdowns as the other European automakers. Sergio Marchionne, CEO of Fiat and Chrysler, has been lobbying for capacity reduction for the past year.

Analysts expect Ford to lose market share in North America as VW, Hyundai and the big Japanese producers ramp up production. The key for investors will be avoiding the profit-ruining discounts that U.S. producers have relied upon in the past, while maintaining strong investment in new models and technology.

Ford’s rollout of its new Fusion midsize sedan this fall could be telling. Reviewers who have seen it say it’s styling is superior – though it faces the new, competitive models from GM, Nissan (NSANY), Honda (HMC) and others.

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The good news this earning season for Ford and other companies hit by a weak global economy – is that they are profitable, even if less so than what would support a rising stock price. It’s disappointing to shareholders but a great joy and relief to creditors considering what could have been