Knife River Corporation (KNF): Valuing Resilience in a Volatile Construction Landscape

The construction materials sector faces a classic conundrum: how to balance near-term volume declines with long-term infrastructure growth. For Knife River Corporation (KNF), the answer lies in strategic acquisitions, margin discipline, and a backlog fueled by historic public funding. Despite Q1 2025 tonnage declines, the company's strengthened EBITDA guidance and valuation multiples suggest it's primed to capitalize on secular tailwinds. Here's why investors should look past the short-term noise.

The Volume Dip: A Temporary Headwind

In Q1 2025, Knife River reported a 9% year-over-year drop in aggregates tonnage and a 10% decline in asphalt sales, driven by pre-production site improvements and winter weather disruptions. These metrics, while concerning, are framed as intentional investments. Management emphasized that Process Improvement Teams (PIT Crews) are reconfiguring quarries for higher efficiency, a move that could boost long-term margins. Meanwhile, price hikes—aggregates rose to $21.05/ton (+6.3% YoY), asphalt to $81.05/ton (+8.8% YoY)—offset volume losses, reflecting pricing power in a constrained supply environment.

Margin Expansion: The Strata Effect

The $45 million EBITDA contribution expected from the Strata Corporation acquisition is a linchpin of KNF's revised guidance. While Q1 consolidated EBITDA fell to $(38.0 million, integration costs and one-time SG&A expenses (up $13 million YoY) weighed on results. However, the West Segment—which gained a $3.5 million one-time gain from Strata—showed a 28% EBITDA jump to $24.9 million. This segment's margin improved to 12.0%, outpacing peers in a sector where margins often shrink under cost pressures.

The Energy Services Segment, despite a steep EBITDA drop to $(7.8 million, is a seasonal loser that typically rebounds in warmer months. Management's focus on public infrastructure projects (87% of backlog) also insulates KNF from private-sector volatility, a critical hedge against rising interest rates.

Valuation: A Discounted Play on Infrastructure

At a P/E of 29.2 as of Q2 2025, KNF trades above its historical average but below its 2024 peak of 34.5. More compelling is its EV/EBITDA ratio of 13.2x, which is below the sector median of 15.5x and a discount to peers like Vulcan Materials (VMC, 18.1x). This multiple compression reflects near-term headwinds but overlooks KNF's $938.7 million backlog—a record high excluding one-time declines—and its $170 million in Q2 backlog additions.

The company's net leverage of 2.5x remains within its 2.0–3.0x target, supported by a $500 million Term Loan B facility and $477 million in undrawn credit. This liquidity buffer allows KNF to weather seasonal losses while funding growth projects like the Kalama River Quarry, which could add 1.5 million tons of aggregates capacity by 2026.

Public Funding: The Long-Term Tailwind

KNF's strategy is underpinned by $1.5 trillion in federal infrastructure spending and state-level bills in Idaho, North Dakota, and Washington. With 87% of its contracting backlog tied to publicly funded projects, the company is less exposed to the housing slowdown gripping private-sector construction. Management noted 51 bills under review across 14 states, suggesting further upside for backlog in 2026.

Risks and the Case for Patience

The SG&A costs are projected to rise by $20 million in 2025, with most expenses front-loaded in Q1/Q2. Meanwhile, weather-related delays in the Mountain and Central regions could prolong margin pressure. Investors must also monitor the $13 million quarterly EBITDA drag from Strata's integration until synergies materialize.

Investment Thesis: Buy the Dip

KNF's 2025 revenue guidance ($3.25–3.45 billion) and EBITDA target ($530–580 million) suggest a 35% EBITDA improvement over 2024. With a backlog at 97% of 2024's record high and pricing power intact, the company is well-positioned to deliver on these goals. At a P/E of 29x, KNF offers a 14% upside to its 2025 EPS estimate of $4.07.

The EV/EBITDA of 13.2x is a compelling entry point for investors willing to look past Q1's noise. For a sector expected to grow at 5–7% annually through 2030, KNF's scale and public infrastructure focus make it a buy for patient investors.

Final Take

Knife River isn't just surviving—it's recalibrating for dominance. The Strata acquisition, margin discipline, and a backlog fueled by infrastructure spending position KNF to outperform in 2025 and beyond. While the next few quarters will test patience, the company's valuation and strategic moat make it a buy for long-term infrastructure exposure.