Infrastructure Funding And EDGE Strategy Will Support Stable Long Term Performance

Catalysts

About Knife River

Knife River Corporation produces and supplies aggregates, ready-mix concrete, asphalt, and construction services for infrastructure and commercial projects across its regional markets.

What are the underlying business or industry changes driving this perspective?

• Record public infrastructure funding and multiyear DOT programs underpin a robust, high-visibility backlog across regions. However, execution remains highly exposed to volatile weather patterns and project phasing, which could cap the translation of this funding into sustained revenue growth and dampen operating leverage on earnings.
• The EDGE strategy and dynamic pricing have driven notable margin expansion in aggregates and ready-mix. At the same time, rising labor, equipment, and regulatory compliance costs in construction-heavy markets may outpace future pricing gains, pressuring consolidated gross margin and limiting further adjusted EBITDA margin improvement.
• There has been strong M&A execution and integration to date. However, continued reliance on acquisition-led growth in aggregates-led platforms increases the risk of overpaying in competitive deal markets or under-delivering on modeled synergies, which could dilute return on invested capital and constrain earnings growth.
• Long-dated transportation packages and large impact projects in states such as Texas, North Dakota, Hawaii, and California support elevated demand for materials. At the same time, greater bid competition and slightly lower contracting margins on the current backlog could compress net margins even as top line revenue expands.
• Oregon appears to be stabilizing with new, though smaller than originally proposed, transportation funding and resumed private aggregate demand. However, ongoing weakness in key hubs like Portland and limited structural improvement in state budgets may restrict regional volume recovery, muting the contribution of this market to consolidated revenue and earnings over the next few years.

Assumptions

This narrative explores a more pessimistic perspective on Knife River compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Knife River's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.9% today to 6.2% in 3 years time.
• The bearish analysts expect earnings to reach $220.6 million (and earnings per share of $3.89) by about December 2028, up from $148.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $262.2 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.7x on those 2028 earnings, down from 29.5x today. This future PE is lower than the current PE for the US Basic Materials industry at 26.7x.
• The bearish analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Record and growing public infrastructure funding across key states, including long dated DOT programs and new multiyear packages in Oregon, Texas, North Dakota, Hawaii and Alaska, could sustain elevated backlog and volumes for aggregates, ready mix and asphalt. This may support above trend revenue growth and push earnings higher than expected.
• Successful execution of the EDGE strategy, including dynamic pricing, process efficiencies and safety and productivity initiatives, has already expanded adjusted EBITDA margin by 320 basis points over three years. Continued scaling of these self help levers could lead to structurally higher net margins and earnings over the long term.
• Ongoing M&A focused on aggregates led, margin accretive targets in midsized high growth markets, combined with a strong balance sheet and dedicated SG&A to support deal flow, could accelerate inorganic expansion and materially increase consolidated revenue and EBITDA beyond a flat share price scenario.
• Large impact projects in California, Hawaii, Alaska and North Dakota, as well as a record and increasingly asphalt heavy backlog in the Mountain and Central regions, may drive higher utilization of plants and equipment. This could improve operating leverage and boost net margins and earnings.
• If weather related and project timing headwinds prove temporary, with normalized conditions allowing Knife River to work down its significantly larger backlog at strong pricing, the company could deliver sustained double digit growth in adjusted EBITDA. This could support a structurally higher valuation multiple and a rising share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Knife River is $75.0, which represents up to two standard deviations below the consensus price target of $96.8. This valuation is based on what can be assumed as the expectations of Knife River's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $75.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $220.6 million, and it would be trading on a PE ratio of 24.7x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $77.29, the analyst price target of $75.0 is 3.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.