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Tobacco stocks are edging higher on Wednesday, after some of the first clues about the new Food & Drug Administration’s approach to e-cigarettes emerged at an industry conference. Wells Fargo sees more good news to come.

The back story. After a dismal showing in 2018, tobacco stocks are looking lit again. Altria Group (ticker: MO) is up just under 12% year to date, nearly keeping pace with the market, while Philip Morris International (PM) has rallied nearly 29% since the start of 2019. Both companies have delivered some robust earnings this year, offer juicy yields, and Altria has also invested in cannabis via Cronos Group (CRON), which has buoyed analyst optimism.

Yet it’s impossible to talk about the industry without mentioning e-cigarettes. Vaping might not be very helpful for those wanting to quit tobacco (and may be linked to seizures), but e-cigarettes continue to take market share from traditional tobacco, while also bringing unwanted attention to cigarette flavoring overall. While Philip Morris has waited for ages for the FDA to approve its own vaping device, Altria invested in Juul Labs late last year to get e-cig exposure, although not everyone liked the deal.

Another recent development that’s boosted the shares is the hope that the government may back off recent regulatory proposals following the recently announced departure of FDA commissioner Scott Gottlieb.

What’s new. Wells Fargo’s Bonnie Herzog attended this week’s conference held by non-profit tobacco consortium TMA, and writes that, not surprisingly, focus centered on flavoring in traditional and e-cigarettes, along with how the FDA plans to approach the industry following Gottlieb’s tenure, which some saw taking a surprisingly hard line on tobacco.

The FDA’s director of the Center for Tobacco Products, Mitch Zeller, was the keynote speaker, providing his first big public appearance since Gottlieb’s announcement. While Zeller was careful to keep the agency’s cards close to his vest, Herzog writes that “the important nuance was what Director Zeller didn’t say. Namely, he refrained from repeating former Commissioner Gottlieb’s strong threats to take more decisive action on youth e-cig access (e.g., removal of evapor pods from the market).” Herzog says that this nuance suggests that the FDA, whose acting commissioner just started at the agency earlier this week, will distance itself from Gottlieb’s more severe approach to regulation.

Still, the agency has its hands full as it tries to drive consumers toward (potentially) less risky vaping products while limiting youth adoption. “It is clearly a delicate balancing act that remains elusive,” Herzog concludes.

Looking ahead. Herzog writes that while presenters at the conference were unified in calling youth vaping a serious problem, there’s little consensus on how it should be fixed. Nonetheless she reiterated her long-time bullish view on the U.S. tobacco firms (she has an Outperform rating on both Altria and Philip Morris).

She writes that although the FDA will continue to try to crack down on youth e-cigarette use, she thinks “major tobacco manufacturers are well-positioned in the current regulatory/political environment driven by strong management teams and a deep reservoir of bench talent and funds to drive innovation.” She also notes that industry consolidation “will increasingly favor scale in the global ‘arms’ race in reduced-risk products (RRPs) while addressing the youth crisis.”

Altria is up 0.4% to $55.34 in recent trading, while Philip Morris is up 0.1% at $85.90.

Write to Teresa Rivas at teresa.rivas@barrons.com