Major change is afoot in the trucking industry, but whether it’s good or bad depends on your perspective. We’re on the right side of history with Growth Stock Strategist pick Supreme Industries, a small-cap company with $285 million of annual revenue from making custom bodies for commercial trucks (see “The Road to Accelerated Profits” on page 1).

We’re confident in Supreme because it focuses on just the right types of commercial vehicles, which are categorized by size from class 1–12. Supreme operates in the sweet spot, classes 3–7. Examples include small box trucks, walk-in cargo vans and urban delivery vehicles.

That’s just where you want to be. Several powerful trends are funneling demand for new trucks toward smaller types and away from class 8 and larger sizes.

Nonstop Deliveries

A major factor in falling demand for larger trucks is e-commerce, which has doubled to $350 billion in the past five years. Industry titan Amazon.com accounts for a third of this, in large part through the estimated 54 million subscribers to its Prime membership service.

Prime comes with free two-day shipping and even free same-day shipping in some cases. Those are services many traditional big box retailers and numerous other online merchants also try to replicate. Promising such fast turnaround means delivery fleets are making home deliveries, far and wide, virtually nonstop.

That’s only possible with smaller, more maneuverable trucks, not the big rigs designed for bulk shipments to large retailers. And it’s part of a broader move toward “right-sizing,” where trucking firms buy the most appropriate equipment for the job to optimize fleet use and cost-efficiency.

Switching to smaller trucks is also a way to address the severe shortage of drivers with a commercial driver’s license, typically necessary to operate the largest trucks but often not required for class 3–7 vehicles. Commercial truck drivers have been a vanishing breed for more than a decade, and some trucking industry analysts estimate the shortage now totals 100,000.

To attract more drivers, trucking companies increasingly offer signing bonuses, higher salaries and lighter driving schedules. Still, driver turnover approaches 100% annually. With the trucking industry also regularly losing experienced drivers to retirement, there’s no end in sight to the shortage or the shift away from larger trucks requiring a commercial driver’s license.

The “R” Word

Another potential drag on the large-truck market: federal regulations aimed at cutting greenhouse gas emissions. To that end, the Environmental Protection Agency recently proposed a 40% increase in the fuel economy of long-haul tractor-trailers and other class 8 trucks from 2010 levels by 2027.

If the regulation or something similar is adopted, these vehicles will have to average nine miles a gallon, up from a little over six a gallon currently. The technology enabling this would add an estimated $10,000 to $20,000 to manufacturing costs per vehicle, though the EPA argues greater fuel efficiency would offset the increase within a few years.

A federal regulation that took effect six months ago is likely to worsen the driver shortage, in turn hurting demand for larger trucks. The new rule alienates veteran truckers and discourages new ones from entering the field by requiring them to buy and install an electronic logging device in their vehicle by the end of next year. Because these devices continuously monitor speed and mileage, they make drivers feel as if they’re always being watched and can’t be trusted to keep a traditional handwritten mileage log.

If adopted, another federal proposal could also put off potential new truck drivers by increasing the amount of training necessary to get a commercial license. Implementing the proposal would cost an estimated $5.6 billion over 10 years, with retailers and other businesses that depend on truck shipments likely passing some or all of the expense to customers.

More Outsourcing

To avoid having to own and operate a trucking fleet, product suppliers increasingly outsource distribution, which also saps large-truck demand. This is because distribution usually involves geographically dispersed deliveries, and that’s a job for smaller trucks—like the ones Supreme Industries helps make.

National truck-leasing firms like Ryder and J.B. Hunt handle the logistics. Besides vehicles and drivers, these firms provide dedicated transportation services covering all aspects of product delivery, such as scheduling, route selection and administrative support. They also offer supply chain solutions—product handling functions such as warehousing, packaging and order fulfillment—and maintenance services for companies that operate their own truck fleet.

At $190 billion, the North American supply chain solutions market is far larger than the $35 billion maintenance segment and the $13 billion dedicated transportation services industry. However, all three hold substantial expansion potential, as only 10% of product delivery logistics are outsourced.

In addition to replacing the expense of truck ownership with a lower leasing cost, outsourcing eliminates personnel issues (hiring, training drivers, etc.). It also circumvents compliance with complex state and federal commercial transportation regulations, which carry substantial fines when violated.

Without these burdens, product suppliers can better focus on their businesses and more easily participate in the switch to alternative energy sources. Thanks to ever-stringent emissions regulations, outsourced trucking fleets increasingly include vehicles that run on natural gas or other cleaner-burning fuels.

After factoring in supply chain solutions, dedicated transportation services and maintenance, logistics outsourcing revenue is projected to climb to nearly $270 billion domestically and $925 billion globally (from today’s $750 billion worldwide) over the next four years.

So Supreme Industries should be plenty busy cranking out bodies for smaller trucks on its way to double-digit profit growth.