Amid all the nervousness that has surrounded the Bank of Canada’s latest rate hike, there have been silver linings – stocks whose businesses are progressing nicely. One of those stocks, Ballard Power Systems Inc. (TSX:BLDP), has rallied 25% so far in June. The other one, Cineplex Inc. (TSX:CGX) has rallied 5.5% in the last five days.
Here’s why I expect both of these stocks to shine in June.
Ballard Power (BLDP) stock: Benefits of scaling and cost reductions
If you recall, Ballard Power has had an extremely bumpy ride over its life. BLDP stock was first listed on the TSX in 1993. Since then, it has been involved in bubbles and busts, all the while never faltering from its mission – to provide the world with zero carbon emissions fuel cells. These fuel cells are ideally suited for heavy duty transportation vehicles such as buses and trucks, as well as certain stationary applications.
So far in June, Ballard Power (BLDP) stock is up a massive 25%. So, what happened? Why is the stock on the move? Well, it all boils down to costs. One of the prohibiting factors that Ballard has had to deal with is the fact that the fuel cell business is an emerging one. As such, there is no scale to bring costs down to levels that would make the business profitable. This has also meant that the cost of ownership and usage for Ballard’s fuel cell vehicles has been prohibitive.
But this week, Ballard shared some good news with us. Essentially, now that Ballard’s fuel cells have been validated (there are 80,000 fuel cell vehicles in operation), it’s all about scaling and cost reduction. This is an exciting new phase, and one that will finally begin to trickle down to the bottom line. In a nutshell, Ballard’s lower cost next generation bipolar plates and a doubling of its manufacturing capacity will result in cost savings of up to 70% by 2026. These technological improvements will start to impact margins in 18 to 24 months.
This provides us with a clear path toward profitability. According to management, EBITDA will break even in the latter half of the decade, with gross margins in the mid-20% range by 2030. The bottom line here is that Ballard’s business is moving ahead nicely. And the macro environment remains very supportive, with constructive policies, low-cost hydrogen, and strong customer interest, which is evidenced by 30% growth in Ballard’s order backlog.
Cineplex: The recovery gains steam as the shares remain undervalued
Cineplex is Canada’s leading movie exhibition company, and so much more. It’s also a gaming destination and leader in digital signage. Today, the movie exhibition business accounts for approximately 70% of its total revenue. So, when this business does well, the stock does well.
In the last five days, Cineplex stock has rallied 5.5%. This rally has been a long time coming, and maybe June is the start of something bigger. In fact, the company’s latest update points me in this direction. Essentially, in the first 11 days of June 2023, box office revenues exceeded 2019 levels – they were actually 121% of the first 11 days of June 2019. If this isn’t a testament to Cineplex and its recovery, I don’t know what is.
But on top of this, we still have the strong growth of the other 30% of Cineplex’s businesses, which should not go ignored. This includes its entertainment facilities and Player One Amusement group. In fact, Cineplex’s amusement solutions group posted a 50% increase in revenue in its latest quarter.
In my view, Cineplex stock is setting up for a strong month. But if I’m wrong about June, I would accept that, because my conviction that Cineplex will do well eventually is very high. So hopefully, the company’s latest update awakens investors to what I think is glaringly obvious. And that is that Cineplex stock is highly undervalued and heading higher soon.
