The United States faces a long-running housing shortage, creating substantial opportunities for homebuilders and the companies that supply them. Builders FirstSource (BLDR -2.09%) might not be a household name, but the company plays a pivotal role in supplying builders with what they need.

The stock has delivered a 1,100% return over the past five years, crushing the likes of Tesla and its 900% gain during the same period. And with Builders FirstSource joining the S&P 500 index later this month, there has never been a better time for investors to take a look at this remarkable growth story.

A one-stop-shop for homebuilders

Builders FirstSource ranks as one of the nation's largest suppliers of building components for residential construction, renovations, and repairs. It sells products including doors, windows, drywall, cabinets, and countertops from 570 distribution and manufacturing locations in 43 states.

About 27% of revenue comes from windows and doors, with nearly equal contributions from lumber, specialty building products, and manufactured products. Overall, Builders FirstSource has locations serving 89 of the largest U.S. housing markets, including a broad presence in the fast-growing Sunbelt states.

The results have been impressive. Builders FirstSource has grown revenue at a compound annualized rate of more than 26% since 2017. A lot of that has been through acquisitions, with Builders FirstSource doing a massive deal in 2020 and completing 14 smaller purchases in the last two years alone to rapidly expand both its product portfolio and its geographic reach.

Even with all that merger and acquisition (M&A) activity, the company is generating enough cash to reward shareholders. Builders FirstSource has repurchased about $4.4 billion worth of shares over the past two years, reducing its share count by 25% since June 2022. The company expects to deploy $5.5 billion to $8.5 billion in cash between 2024 and 2026 on share repurchases and continued acquisitions.

The home construction boom is only getting started

Builders FirstSource management is giving no indication they expect growth to slow any time soon. At a recent investor day event, the company said it was targeting revenue growth of 9% annually through 2026 and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 12% annually, fueled in part by an expected 30 basis-point expansion of EBITDA margins each year thanks to investments in automations and merger-related efficiencies.

This is a massive market. Builders buy about $110 billion worth of materials and supplies annually for single-family construction alone. Builders FirstSource currently commands just 11% of the market for supplies for single-family dwellings, and less than 2% of the market for multifamily construction and renovations.

With the U.S. home market underbuilt by upwards of 3.5 million units, according to government estimates, there should be solid demand for construction materials in years to come.

Is Builders FirstSource stock a buy ahead of its inclusion in the S&P 500?

Joining an index tends to provide a short-term boost to a stock, as mutual funds and exchange-traded funds (ETFs) tracking the index are required to buy shares of added companies. There is also a level of prestige in being a part of the S&P 500 that could attract new attention to the company.

But the case for long-term-focused investors to buy Builders FirstSource is the strength of the business and not what index it belongs to. It has been a period of adjustment for homebuilders as markets adjust to higher rates, and Builders FirstSource has seen quarterly revenue fall year over year in 2023.

With rates expected to stabilize heading into 2024, construction and renovation activity is likely to pick up. Builders FirstSource, with its national scale and breadth of products, has the ability to build on its relationships with large homebuilders and offer a product consistency and reliable supply that smaller vendors cannot match. The company also has an online portal that allows customers to shop products, make 3D design models, and customize doors and windows to fit tight renovations.

There are a lot of ways for investors to win here. Builders FirstSource has the size and scale to outperform in what should be a growing housing market through the end of the decade. Doing so will generate billions in excess cash to either reinvest in the business or continue to eat away at its share count.

Builders FirstSource has quietly outperformed some of the best names in tech in recent years. With its inclusion in the S&P 500, the next few years might not be as quiet. But for those looking to invest in a growing housing market without trying to pick winners among individual homebuilders, Builders FirstSource could be an intriguing addition to the portfolio.