Industry Backdrop and Pricing Power: The Long-Term Moat of the Aggregates Industry
The aggregates industry benefits from long-term demand growth and supply-side constraints, providing strong pricing power that underpins Knife River's margin improvement opportunity.
Aggregates (crushed stone, sand, gravel) are essential, irreplaceable materials for construction and infrastructure. The U.S. faces a severe aging infrastructure problem, creating long-term, sustained demand growth. Although public infrastructure spending has grown over the past decades, U.S. infrastructure investment as a percentage of GDP still lags other developed countries.
However, strong demand is only half the story. The supply side faces significant constraints. Due to permitting and zoning regulations, environmental concerns, and 'NIMBYism,' opening new quarries in the U.S. is extremely difficult. Over the past 25+ years, the number of crushed stone quarries in the U.S. has remained essentially flat at around 3,500.
Aggregates themselves are low-value ($15-$25 per ton) but expensive to transport, granting significant pricing power to local market leaders. This pricing power is well-documented historically, with aggregates prices rising consistently for over a century, while volumes are cyclical.
In 2026, the entire industry underperformed due to concerns over diesel cost inflation. As of October 12, 2026, the industry median (including KNF) was down ~23% year-to-date, while diesel prices rose 76% over the same period. However, Starboard notes that a similar situation occurred in 2022. At that time, the industry successfully offset inflationary pressures using its pricing power, achieving sustained margin expansion, and stocks subsequently rebounded significantly, rising 53% from their lows. Starboard believes current market concerns present a rare opportunity to acquire these high-quality businesses with strong pricing power.
| 2026 YTD comparison basis | Share-price performance | Context |
|---|---|---|
| Industry chart on p17 (includes KNF) | Industry median -23% | Diesel price +76% |
| Company comparison on p22 | KNF -29.7%; peer median -21.8% | Different peer grouping |
Source p17 p22。Market data as of 2026-10-12. The peer groups differ; -23% and -21.8% are not interchangeable exact readings.
Knife River's Margin Gap: The Disconnect Between Post-Spin-Off Promises and Reality
Since its spin-off in 2023, Knife River's margin improvement has lagged far behind its peers, causing the gap to peers and its own implied targets to widen.
Knife River was spun off from its utility parent, MDU Resources, in 2023. It is a vertically integrated construction materials and contracting services company, concentrated in population growth regions of the U.S. Midwest and West.
At the time of the spin-off, management explicitly acknowledged a significant margin gap versus peers and committed to closing it through its 'EDGE' strategy. At that time, Knife River's adjusted EBITDA margin was 11.7%, compared to a peer median of 22.2%, a gap of over 1,000 basis points. Management set formal targets: reaching 15% by FY2025 (still ~700 bps below peers) and a long-term target of 20% (~200 bps below peers).
However, since the spin-off, industry margins have expanded significantly from 22% to approximately 29%. This means that for Knife River to maintain its originally set ~700 bps gap to peers, its near-term margin target should have been revised upward from 15% to 22%. But in reality, Knife River's margin improvement has not kept pace. Its LTM adjusted EBITDA margin is only 15.1%, well below the implied 22% target, and the gap to the peer median of 29.0% has widened to approximately 1,390 bps. Starboard believes Knife River's current appropriate adjusted EBITDA margin should be 22%.
| Basis | Knife River | Peer / comparison |
|---|---|---|
| CY2022A separation baseline | 11.7% | Peer median 22.2%; gap approximately 1,053bps |
| Original management FY2025 target | 15% | About 700bps below baseline peers |
| Original management long-term target | 20% | About 200bps below baseline peers |
| Actual LTM in presentation | 15.1% | Peer median 29.0% |
| Starboard updated target | 22% | Maintains the initial approximately 700bps gap as peer margins rise |
Source p30 p31 p33 p34。Adjusted EBITDA margins. Original management targets, LTM actuals and Starboard targets are distinct.
Segment Peer Comparison: Validating the Feasibility of the 22% Margin Target
By comparing Knife River's two business segments to their most comparable peers, Starboard demonstrates that a consolidated adjusted EBITDA margin of 22% is entirely achievable.
Knife River operates two business segments with distinctly different margin profiles: Construction Materials (56% of revenue, 76% of gross profit) and Contracting Services (44% of revenue, 24% of gross profit). Currently, the Construction Materials segment has an adjusted EBITDA margin of 20.5%, while the Contracting Services segment has 8.2%.
For a more precise comparison, Starboard assigned weights to peers based on business similarity. CRH (40%) and ROAD (32.5%) received the highest weights due to their highly comparable vertically integrated model or contracting services business. The weighted peer margin history shows that Knife River's margin gap has fluctuated between 336 and 579 bps, further supporting the view that its margin should be in the low 20% range.
| Peer | Business comparability | Weight |
|---|---|---|
| EXP | Wallboard exposure; structurally different margin profile | 5.0% |
| VMC | Predominantly aggregates; minimal downstream contracting | 5.0% |
| MLM | Predominantly aggregates; limited downstream contracting | 5.0% |
| AMRZ | Downstream materials plus unrelated roofing | 12.5% |
| ROAD | Road paving and construction services | 32.5% |
| CRH | Highly comparable vertically integrated materials and contracting | 40.0% |
Source p42。Source weights based on business comparability, totaling 100%.
| Period | Weighted peer margin | KNF margin | Gap stated in source |
|---|---|---|---|
| 2022A | 16.5% | 11.7% | 477bps |
| 2023A | 18.6% | 15.3% | 336bps |
| 2024A | 20.0% | 16.0% | 408bps |
| 2025A | 21.2% | 15.8% | 540bps |
| LTM | 20.9% | 15.1% | 579bps |
Source p43。Gaps retain the source labels based on unrounded inputs; displayed margins are rounded to one decimal.
Further segment-level analysis shows:
- Construction Materials Segment: Its 20.5% margin is well below the 30.6% median of materials peers (MLM, EXP, VMC, AMRZ), a gap of over 1,000 bps.
- Contracting Services Segment: Its 8.2% margin is also below the 13.5% median of construction services peers (CRH, ROAD, GVA), a gap of ~500 bps.
Starboard's calculation indicates that if Knife River's two segments could each reach their respective peer median margin levels, the consolidated adjusted EBITDA margin would be at least 22%.
| Business | Revenue / gross profit mix | Current margin | Peer-segment margin |
|---|---|---|---|
| Construction Materials | 56% / 76% | 20.5% | 30.6% |
| Contracting Services | 44% / 24% | 8.2% | 13.5% |
| Consolidated | Business-mix adjusted | Approximately 15% | At least 22% |
Source p44 p48。Adjusted EBITDA margins. Revenue weights and gross-profit weights are different.
Drivers of Margin Improvement: The Dual Levers of Pricing and Cost
Knife River can achieve the 22% margin target through two specific and quantifiable levers: increasing aggregates prices and reducing SG&A costs.
Starboard identifies two key levers to help Knife River close the margin gap:
Lever One: Increase Aggregates Prices
Knife River's aggregates selling price has historically been below peers. In FY2025, its price was $15.03/ton, compared to a peer median of $22.64/ton, a gap of $7.61/ton. This gap has even widened since the spin-off.
Based on Starboard's estimates, with an annual production volume of ~35 million tons and a ~85% flow-through rate, each $1/ton increase in price would generate approximately $30 million in incremental EBITDA. Therefore, the total $7.61/ton price gap represents a total EBITDA opportunity of approximately $225 million. Starboard believes Knife River can capture roughly $125 million of this over the next three years.
| Lever / basis | Source value |
|---|---|
| FY2025 aggregates price: peers / KNF | $22.64/ton / $15.03/ton |
| Price gap | $7.61/ton |
| Each $1/ton price increase | $30M incremental EBITDA (approximately 35M tons and 85% flow-through assumption) |
| Total pricing opportunity | Approximately $225M on p53 and $226M on p54 |
| Achievable pricing opportunity over three years | Approximately $125M |
| LTM adjusted SG&A / sales | KNF 9.5%; peer median 7.0%; approximately 250bps gap |
Source p51 p52 p53 p54 p55。$125M is the pricing opportunity alone, before the separate SG&A opportunity. Volume and flow-through are source assumptions; rounded inputs do not support spurious precision.
Lever Two: Reduce SG&A Costs
Knife River's cost structure is also higher than peers. Its LTM adjusted SG&A as a percentage of sales is 9.5%, compared to a peer median of 7.0%, a gap of ~250 bps. This suggests additional cost savings potential through operational efficiency.
Starboard emphasizes that the $125 million pricing opportunity is independent and does not include potential benefits from SG&A savings.
Valuation Upside and Strategic Value: Dual Paths to Shareholder Value Creation
Even considering only its own margin improvement, Knife River's valuation is highly attractive; in the context of industry consolidation, its value as a scarce asset is significantly underestimated by the market.
Standalone Valuation Scenario
As of October 12, 2026, Knife River trades at a 2027E adjusted EBITDA EV/EBITDA multiple of 7.7x, below the peer median of 9.6x. If Knife River can achieve a 22% margin, its pro forma multiple would further compress to 5.5x, indicating that the current stock price does not reflect its earnings improvement potential.
| 2027E adjusted EBITDA multiple | Multiple |
|---|---|
| VMC | 13.5x |
| MLM | 11.5x |
| ROAD | 10.6x |
| EXP | 8.7x |
| CRH | 7.8x |
| AMRZ | 7.6x |
| Peer median | 9.6x |
| Current KNF | 7.7x |
| KNF at 22% margins | 5.5x |
Source p56 p60。Market data as of 2026-10-12. KNF trades at 7.7x, or 5.5x under the 22% margin scenario.
Strategic Value Scenario
Beyond standalone improvement, Knife River itself is a highly attractive acquisition target. The industry is consolidating rapidly, and Knife River possesses scarce, difficult-to-replicate aggregate resources and a vertically integrated platform. For peers facing market saturation and needing expansion, acquiring Knife River is an effective path to growth.
Several recent major M&A transactions in the industry provide a reference for Knife River's strategic value. The median EV/EBITDA multiple for these transactions is 12.4x, with an average of 13.7x, well above Knife River's current 7.7x trading multiple.
| Announcement date | Target / acquirer | Price ($M) | EBITDA ($M) | Multiple / basis |
|---|---|---|---|---|
| 2026-06-29 | Lhoist / MLM | 13,500 | 786 | 17.2x / 2025A |
| 2026-06-22 | Arcosa / CRH | 8,500 | 565 | 15.0x / 2026E |
| 2024-11-25 | Summit Materials / Quikrete | 11,500 | 980 | 11.7x / 2024E |
| 2024-08-01 | Stavola / Arcosa | 1,200 | 100 | 12.0x / LTM |
| 2023-11-21 | MLM Texas Assets / CRH | 2,100 | 170 | 12.4x / LTM |
| Statistics | Median / mean | — | — | 12.4x / 13.7x |
Source p60。Lhoist EBITDA is for the twelve months ended 2025-12-31; Arcosa is 2026E. The first two transaction multiples exclude disclosed run-rate cost synergies. Historical and forecast periods are different.
Starboard concludes that whether through management's own efforts to improve margins or through the release of strategic value via acquisition, Knife River offers significant upside for shareholders.