Stocks of several restaurant chains are among the most surprising big beneficiaries of cuts in corporate tax rates under the new federal tax law. Restaurants typically have paid a higher effective tax rate after deductions and credits than many other industries, so lower taxes will lead to substantial improvements in their earnings and cash flow. Many restaurants plan to use the extra cash to attract more traffic by remodeling stores, upgrading food quality and portions, and increasing employee wages and benefits. Some restaurants also are expected to use the windfall to improve their balance sheets by paying off debt and to repurchase stock and raise dividends. Returns on these investments should boost earnings and cash flows, resulting in strong restaurant stock price performance in 2018.

Restaurant stocks likely to benefit…

Domino’s Pizza (DPZ) should see earnings per share increase 30% and free cash flow rise 24%. It will use the cash to enhance supply chain capabilities and invest in new technologies to improve customer convenience. Also, franchisees will have more cash to open stores. Recent share price: $215.33.

 Texas Roadhouse (TXRH) operates more than 500 Western-themed steakhouse restaurants. Lower taxes should boost earnings per share by at least 22% and free cash flow by 25%. The additional cash will likely be used to improve service, keep menu prices low and boost the dividend. Recent share price: $59.97.

Wingstop (WING), with more than 1,000 franchises, specializes in chicken wings. Lower taxes should support a 20% increase in earnings per share and 22% increase in free cash flow. The savings will be used to expand digital ordering and delivery capabilities and increase the dividend. Recent share price: $47.84.

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