Prius Steers Toyota Wrong?

How painful has it been to own auto stocks? Ask Ford (NYSE: F  ) and General Motors (NYSE: GM  ) shareholders; they'll cry in your beer all day long. They've got plenty of company, of course; automaking just isn't as good a business as it used to be. Unless, that is, you're talking about Toyota (NYSE: TM  ) . Not even bad news can slow the Japanese giant down.

On Tuesday, Toyota announced a recall, or "voluntary Special Service Campaign," of nearly a million vehicles because of a flaw that could cause drivers to lose control behind the wheel. Included in that number are some 170,000 Prius hybrids, roughly two-thirds of the total Toyota has sold in the U.S. Globally, more than 986,000 vehicles of various models could be affected, according to the Detroit Free Press. In the U.S., the recall involves certain 2004 through early 2006 model year Prius vehicles.

The recall is significant, and the flaw also sounds dangerous. Press reports say that the shafts and yokes in the recalled cars could crack under pressure, forcing the car out of control. Yikes.

Naturally, investors took to that news like a pig to a bubble bath, sending the stock lower by a little more than 2% as of Tuesday's close. But the shares have since rallied, and I think I know why.

First, the damage may not be as bad as some may think. The fix appears to require only changes to the steering column, but not much more. Second, while Toyota says that it has received more than 30 complaints relating to the problem since March 2004, no accidents relating to the flaw have been reported. Instead, executives are proactively addressing a less-than-fully developed problem that could impact future sales.

That's the kind of take-action management that shareholders should truly love. Why? It creates brand loyalty, and it leaves no opening for hungry competitors hoping to expose a chink in the armor. As Toyota spokesman Bill Kwong told the Free Press, "We're very concerned. We're not going to wait until we get complaints from U.S. consumers."

Is there anything more Foolish than that? Not in my book.

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Fool contributorTim Beyersstill drives an SUV, but he'd rather be driving a hybrid Mustang. Whaddaya say, Ford? Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out which stocks he owns by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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