Knife River Stock Has Tumbled 31% This Past Year, but One Fund Placed a $22 Million Bet on a Turnaround

Paradice Investment Management initiated a new position in Knife River (312,743 shares) valued at $22.0M at quarter-end, representing 4.28% of Paradice’s 13F reportable assets and placing the holding outside the fund's top five. Knife River reported quarter metrics showing revenue up 9% YoY to $1.2B and adjusted EBITDA up 11% to $272.8M, a record backlog of $995M (up 32%, 87% public work) and $528M in acquisitions year-to-date with net leverage ~2.6x; shares traded at $68.59 on Jan 27 and are down ~31.4% over the past year. The trade signals a rotation toward infrastructure-linked, nearer-term cash flow exposure driven by public funding and recent M&A, rather than longer-cycle industrial exposure.

Analysis

Market structure: Paradice’s new ~4.3% position in Knife River (KNF) signals a rotation into near-term cash-flow exposed infrastructure materials; beneficiaries include vertically integrated aggregates/asphalt/ready-mix providers (KNF, peers) and contractors winning public work, while long-cycle industrials tied to capex (e.g., Chart Industries-like exposures) are relative losers. KNF’s record backlog of $995M (87% public, ~75% converting within 12 months) implies near-term pricing power and utilization lift that should support EBITDA conversion and local pricing versus independent quarries. Cross-asset impacts are modest but directional: stronger infrastructure activity lifts diesel/bitumen and construction commodity prices, supports higher short-term muni issuance (project funding), and should compress KNF’s credit spreads if leverage falls below 2.0x as targeted.

Risk assessment: Key tail risks are public funding cuts or timing slippage (state/municipal budget delays), adverse permitting/weather that defers conversion, and M&A integration failing after the $528M of acquisitions—each could drive >30% EPS downside. Timeframes: immediate (days-weeks) sentiment-driven repricing; short-term (1–4 quarters) earnings/backlog conversion tests; long-term (2–4 quarters+) hinges on deleveraging from ~2.6x to <2.0x. Monitor conversion rate (target >70% within 12 months), interest cost sensitivity (>100bp moves), and fuel/asphalt input inflation as hidden dependencies.

Trade implications: Tactical longs in KNF are justified if position-sized and hedged — expect 12-month upside of 20–30% if backlog converts and leverage improves; downside >30% if public projects stall. Use directional equity for conviction and options to define risk: buy-dated calls or call spreads to capture recovery while capping premium. Consider relative plays long KNF / short broad cyclicals (XLI) to isolate infrastructure vs general industrial risk.

Contrarian angles: Consensus underweights integration and municipal budget timing—market may be underpricing short-term execution risk (hence KNF’s -31% YTD). Conversely, the selloff can be overdone because 87% public backlog is less elastic to commodity cycles; historical parallels (post‑infrastructure funding ramps) show multi-quarter EBITDA catch-up. Unintended consequences include rising local input costs and heavier environmental/regulatory capex needs that compress cash flow despite headline backlog growth.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in KNF (buy shares around $65–72) with a 12-month horizon; target +25% upside (~$85) if backlog converts and adjusted EBITDA growth continues, and set a hard stop-loss of 18% (~$56) to limit downside from funding slippage.
• Implement a hedged options approach instead of outright equity if risk-averse: buy 12-month KNF LEAPS (Jan 2027) ATM call (strike ≈70) sized to 0.5–1% portfolio delta and finance by selling a 6-month 1.25–1.5x OTM call; take profits if KNF >+30% or implied vol falls >40% from current levels.
• Construct a dollar-neutral pair: long KNF (1–2% weight) vs short XLI (industrial ETF) equal notional to express preference for infrastructure materials over broad industrial cyclicals; rebalance monthly and close if relative outperformance >20% or KNF leverage fails to trend toward <2.0x by next two quarters.
• Trim 1–2% exposure to long-duration, high-capex industrials (names exposed to extended cyclical demand) and redeploy into KNF/FLS-type names where >50% revenue is visible from public work; only re-add cyclical exposure after 2 consecutive quarters of municipal funding clarity and KNF EBITDA beats.