Shares of Altria Group (MO) are on the rise after Berenberg analyst Jonathan Leinster upgraded the stock to Buy, citing the proposed tax changes under the new Republican bill that he expects to be approved soon. Additionally, the analyst also argued that recent regulatory fears seem to be overblown.

BUY ALTRIA GROUP: In a research note this morning, Berenberg’s Leinster upgraded Altria Group to Buy from Hold to reflect the proposed U.S. corporate tax changes. While he acknowledged that there are “undoubtedly” a significant number of complications, including foreign income dividends and ceilings on the amount of tax deductibility of debt interest, the analyst told investors that he believes that the major impact of the Republican tax bill on Altria will simply be the reduction in the base rate. He has assumed that the headline rate for the company will decline from 35%-36% to 21%-22%. Overall, Leinster believes the tax changes should have an impact on just the domestic operations and not on the foreign income dividend from Altria’s 10% stake in AB-InBev (BUD). The analyst also added that investors should note that because the company broadly returns 100% of free cash flow to shareholders, the rise in expected earnings also means an increase in cash returns of more than 20%.

OVERBLOWN REGULATORY FEARS: Additionally, Berenberg’s Leinster argued that while the U.S. Food and Drug Administration’s announcement of a new vision for the U.S. market, he believes the FDA would face years of opposition to any changes that significantly undermined cigarette volumes. Either there will be compromise on all sides or implementation will take years, he contended. While Leinster notes that the shift away from conventional cigarettes has been ongoing for years, he pointed out that the industry needs to improve the daily unit profitability of some of its non-cigarette products and to develop non-cigarette products that appeal more to women.

NEW PRODUCTS: Leinster highlighted that Altria will be the license-holder and distributor for the iQOS heated tobacco product in the U.S., and noted that he expects the FDA to approve the premarket tobacco product application for this product in the first quarter of 2018.