Bullish View That Public Infrastructure Funding Will Drive Stronger Long Term Performance

Catalysts

About Knife River

Knife River produces aggregates, ready mix concrete, asphalt and related contracting and energy services across multiple U.S. regions.

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

• Record third quarter revenue of US$1.2b and adjusted EBITDA of US$273 million, alongside a 22.7% adjusted EBITDA margin and higher gross margins across aggregates, ready mix and asphalt, point to company wide pricing and cost initiatives that management is still rolling out. These initiatives could further support revenue and earnings quality over time.
• Public infrastructure funding is described as strong or at record levels in multiple states, with record third quarter backlog and 32% higher contracting backlog that includes significantly more asphalt paving work. This can increase pull through volumes of higher margin upstream materials and support both revenue and net margins.
• The competitive EDGE plan centers on materials led M&A, process efficiencies, and a dynamic pricing model. Management reports multiple deals in the pipeline and recent acquisitions such as Strata and Albina Asphalt performing in line with expectations, which can add to scale, margin accretion and EBITDA growth if integrated on similar terms.
• Strong funding and bidding pipelines in key regions, including a 10 year US$4.3b Oregon transportation package and a North Dakota DOT program expected to bid about US$750 million of 2026 work compared with US$345 million in 2025, support a multi year project base. This can help drive materials volumes, utilization of the equipment pool and earnings resilience.
• Ready mix and aggregates are seeing higher pricing and margin improvement, aided by commercial excellence efforts, batching and delivery efficiencies, and the contribution of 24 ready mix plants from Strata. These factors collectively position these core product lines as key drivers of future revenue and EBITDA margin expansion.

Assumptions

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

• The bullish analysts are assuming Knife River's revenue will grow by 9.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.9% today to 6.6% in 3 years time.
• The bullish analysts expect earnings to reach $264.9 million (and earnings per share of $4.73) by about January 2029, up from $148.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $223.0 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 32.9x on those 2029 earnings, up from 28.5x today. This future PE is greater than the current PE for the US Basic Materials industry at 26.0x.
• The bullish 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 8.54%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Knife River’s heavy reliance on public infrastructure funding, including Oregon’s 10 year US$4.3b transportation package that is already smaller than initially proposed, means any future shortfall in state or DOT budgets, delays in bid lettings, or reallocation of funds could reduce project flow and pull through volumes for aggregates, ready mix and asphalt, which would pressure revenue and limit EBITDA growth.
• The business model leans heavily on asphalt paving and related internal materials demand, yet management highlighted periods of less paving work in the Mountain and Central segments due to project timing, work type, phasing and weather. If these conditions persist or recur, plant utilization could remain suboptimal and weigh on gross margins and overall earnings.
• Growth in recent years has been supported by acquisitions such as Strata and Albina Asphalt, and the company continues to invest heavily in M&A and organic expansion. Any overpayment, integration difficulties or weaker than expected contribution from acquired assets would risk higher SG&A, slower margin improvement and softer returns on invested capital, which would affect net margins and long term earnings quality.
• Several key markets such as Oregon and the Mountain region face local economic and competitive pressures, including trade related softness in Portland and changing bid room dynamics. If private non residential demand stalls again or competitive intensity erodes pricing power, the company’s ability to maintain mid single to high single digit price gains could be challenged, putting pressure on gross margins and EBITDA.

Valuation

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

• The assumed bullish price target for Knife River is $120.0, which represents up to two standard deviations above 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2029, revenues will be $4.0 billion, earnings will come to $264.9 million, and it would be trading on a PE ratio of 32.9x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $74.64, the analyst price target of $120.0 is 37.8% higher.
  
• 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.