The Motley Fool

TSX Stock Warning: Over 4,000 Hotels Could Go Out of Business in 2021!

Image source: Getty Images

The coronavirus pandemic has severely impacted several industries since spreading across the world in late 2019 and early 2020. Airlines, restaurants, and entertainment are just some of the most highly affected TSX stocks. Another highly impacted business sector is the hotel industry.

Hotels are key to the economy and, in good times, can be major cash cows. However, due to the pandemic, hotels have seen sales numbers drop dramatically.

Travel is now being heavily impacted, both domestically and internationally. Furthermore, work conferences have all been postponed, and even though hotels are still open for operation, many are too worried about their health to risk staying in a hotel.

Hotels can’t host any large events either, such as weddings or large parties. So these companies are effectively sitting empty, with some losing more than 90% of their pre-pandemic revenue.

Like all the other heavily affected TSX stocks, these companies are just trying to bide their time. There is nothing that hotels can do for now except just try to survive until enough of the population has been vaccinated, and the coronavirus pandemic is in the rearview.

Unfortunately, that may not come soon enough, and some experts believe that up to 4,000 hotels or more than 50% of those in Canada could go out of business before we emerge from the pandemic.

Certainly, 4,000 hotels going out of business is shocking, especially when you consider all the jobs that will be lost. However, the extent of the economic consequences goes much further than that.

TSX stocks this could affect

In addition to employing hundreds of thousands of people, those hotels also employ other companies to perform services or deliver goods. So a major impact on hotels could have a ripple effect across multiple industries.

One of the TSX stocks in the services industries is K-Bro Linen Inc (TSX:KBL).

K-Bro is a great company. Unfortunately, it’s just been impacted severely by the pandemic. The company operates in two segments, healthcare, and hospitality.

So while healthcare has helped keep the business somewhat resilient, the major losses in the hospitality side of the business have weighed on K-Bro’s profitability.

During the second quarter of the pandemic, during the brunt of the shutdowns, K-Bro’s revenue fell by 40% year over year. That recovered slightly in the third quarter, down just 25% year over year. However, it’s clear that if several of K-Bro’s customers were to go out of business, its operations would be significantly impact.

In addition to hotels, K-Bro serves other hospitality and tourism businesses such as airlines, which are in a similar situation.

So with the TSX stock rallying nearly 40% in November and now sitting roughly 15% off its 52-week high, there could be considerable risks for investors.

While I don’t think you should avoid the TSX stock altogether since K-Bro is a high-quality long-term business with a dominant position in its industry. I do think that you should pay close attention to how its main customer industries are performing and what developments may happen.

Government stimulus, for one, would be beneficial. Because if these businesses can just weather the storm for another six months, the chances of survival will be that much greater.

Bottom line

With the intricacies of our economy, it’s important you analyze not just the stock you are buying but other businesses and industries that can impact its performance.

K-bro is one of the top long-term TSX stocks in Canada, but if many of its customers go out of business, there’s nothing it can do.

Although investors should consider taking a wait and see approach with K-bro, here are 10 top TSX stocks to buy now in December...

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.