Krause Fund Research Fall 2011 Consumer Discretionary Recommendation: BUY

Analysts
Kaila Krum kaila-krum@uiowa.edu Adam Hasselquist adam-hasselquist@uiowa.edu Andrea Janus andrea-janus@uiowa.edu Lisa Zaiceva lisa-zaiceva@uiowa.edu

Yum! Brands (NYSE: YUM)

November 11, 2011
Current Price Target Price $55.81 $63-69

A Brand New Strategy

YUM, a leader in the fast-food industry, is an attractive investment primarily because of its recent global expansion. While about 36% of revenue in 2010 is from the companyowned China Division, we predict that by 2015 upwards of 50% of profits are likely to be from Asia. There is opportunity for YUM to further expand into emerging markets, especially finding opportunity in its KFC brands, which has added 650 more international restaurants than McDonalds over the past 5 years. Additionally, Taco Bell demonstrates investment potential as it is the fastest-growing international restaurant brand. YUM is looking to expand into five new markets: Germany, France, Russia, Africa, and India, and boast profit growth to $1B by 2015 (15% emerging markets, 6% in developed markets). As GDP forecasts and consumer spending forecasts remain volatile, we conclude YUM to be a good investment as it provides a pocket-friendly dining solution. YUM is positioned to gain from a heightened unemployment rate as high unemployment will allow for less expensive labor and a greater consumer base as consumers move from more expensive dining to fast-food options. Due to previously mentioned economic factors, we forecast an approximate 30% increase in YUMs gross margin.

Company Overview
Founded in 1997 and headquarted in Louisville, Kentucky, Yum! Brands (YUM) operates as a series of quick-service restaurants and is a world leader in the fast-food industry. The company develops, operates, franchises, and licenses its restaurants, which produce and sell a variety of food items. As of year-end 2010, YUM operated 30,900 international units, in 123 countries and territories, under the KFC, Pizza Hut, Taco Bell, Long John Silvers, and A&W All-American Food Restaurants brands. In September 2011, YUM sold its Long John Silvers and A&W restaurants to A Great American Brand LLC, and is now focusing on expanding its current brands into China.

Stock Performance Highlights

52 week High 52 week Low Beta Value Average Daily Volume $57.75 $46.27 0.86 5.068M

Share Highlights
Market Capitalization Shares Outstanding Book Value per share EPS (2010) P/E Ratio Dividend Yield Dividend Payout Ratio $24.33B 460.50 M $4.32 $2.55 20.73 1.90% 39%

One Year Stock Performance

Company Performance Highlights

ROA ROE Sales 14.40% 67.36% $12.08B

Financial Ratios
Current Ratio Debt to Equity 1.04 154.92%
Source: Yahoo! Finance (Blue: YUM; Green: S&P 500

Important disclosures appear on the last page of this report.

Investment Thesis Based on our valuation analysis, we conclude that Yum! Brands (YUM) is undervalued at its current price of $55.81. Our BUY investment recommendation is stems from company-specific factors such as new business initiatives to further increase new unit openings and expand into emerging markets. Additionally, YUM has consistently returned capital to shareholders in the form of both buybacks and dividends, as reflected in the recent company announcement (3Q11) of a 14% increase in quarterly dividend 1, a trend we expect to continue. Furthermore, a slow, but steady, economic recovery is likely to benefit the quick-service restaurant industry. We have instituted a target price range of $63.00 to $69.00 based on our valuation models, which represents a 12.88% to 23.63% premium on the current market price.

Figure 1

Source: William Blair Monthly Morsels Report

Economic Outlook Although the United States is not officially in a period of recession, it is showing signals of a recessional recovery. The Gross Domestic Product grew only 2.5% compared to the historical quarterly GDP growth of 3.28% 2. We expect the GDP to grow slowly in the next quarter and in the future and consumer confidence to improve. The current and predicted increases in commodity prices are, and will be, unfavorable for the restaurant industry. However, the cost of commodity price increases will be offset by the high unemployment rate, which benefits the restaurant industry. Real Gross Domestic Product (GDP) The real Gross Domestic Product, or GDP, is often used as an indicator of a countrys standard of living as it measures the value of all goods and services produced in a given year 3. Within GDP, we find it most relevant to focus on consumption, which includes both health care and consumer discretionary spending and composes about 70% of the U.S. GDP 4. Consumer spending has historically made up the majority of consumption and is one of the most relevant economic indicators for the restaurant industry2. As demonstrated in Figure 1, restaurant sales growth has consistently outpaced real GDP growth.

The Federal Reserve estimates the U.S. GDP will rise between 2.5% to 2.9% next year, down from the June prediction of 3.3% to 3.7% 5. Due to the U.S. economy growing 2.5% in the third quarter of 2011, compared to 1.3% in the second quarter, we conquer with the Federal Reserves estimate. We expect growth to improve slightly to 2.7% for 2012 year, the midpoint of the Federal Reserve prediction. We foresee that the GDP will continue growing at slow and steady rate into the future due to a gradual improvement in consumer spending but will be offset by the expected impact of low government spending. The moderate increase in GDP will positively impact the consumer discretionary industry. We conclude that quick-service and fast-casual restaurants will primarily benefit from the steady but small GDP growth. The general public will likely spend less on high-end dining, and opt for less expensive food options. YUM is well-positioned to benefit from these dining habits as consumers that have chosen to eat at home will likely stay cautious but begin to eat at quick-service and fast-casual restaurants. Unemployment The restaurant industry is positively affected by an increase in the unemployment rate due to the fact that wages are a significant expense. When the unemployment rate is low, restaurants often have to raise wages to retain and attract workers. High unemployment rates control wage inflation and ease the hiring process for restaurants. The unemployment rate also has a direct effect on consumer spending. As a consumers income decreases, he or she is likely to shift from more expensive food options to quickservice or fast-casual restaurants 6. The unemployment rate significantly increased from 2008 to 2010, as demonstrated in Figure 2. After reaching a 5 year low in late 2007, it rapidly increased to 10.0% in December 2009 7. The last announced unemployment rate fell 0.1% to 9% as of early November 2011 8. Despite this slight decline, based on historical data and current economic events, we expect 1

that within the next six months, the unemployment rate will remain steady or gradually increase to 9.3% at most. We also predict that the number of jobs will stay the same while the labor pool will continue to grow, but that the unemployment rates will begin to lower to 8% in the next two years as the economy begins to recover. YUM will benefit from the high unemployment rate, which will control wage inflation and cause consumers to switch from specialty and casual dining to quickservice and fast-casual restaurants. Figure 2

Commodity Prices/ Producer Price Index (PPI) The Producer Price Index measures the change in input costs for producers and can be adjusted to include only the change in commodity prices 12. Variations in commodity prices influence operating margins and sale prices, as food inputs account for 33 cents of every dollar and are a significant expense for businesses in the restaurant industry 13. Due to a rise in demand for many agricultural products, commodity prices will increase 14. One of the commodities that will increase is corn, because of rising demand for fuel made from corn and governmental pushes to develop corn based fuel. We predict that in the next 6 months the PPI and commodity prices will rise 2%-3% and the price of beef will rise 11%-14%. In the long-run, the PPI and commodity prices are expected to decrease by 1%; however, commodities such as beef and dairy are expected to increase in price, as shown in Figure 3 below. Figure 3

Source: NetAdvantage 9

Consumer Price Index (CPI) The consumer price index, which gauges the change in price of consumer goods and services, is the primary measure of inflation 10. Generally, the CPI increases on an annual basis; however, there was a minor decline in CPI from 2008 to 2009 due to the recession. Since then, the CPI has increased by 1.6% from 2009 to 2010 and the first 9 months of data for 2011 show consistent increases from the previous year 11. The Federal Reserve has announced it will continue to hold interest rates near zero until mid-2013 and because interest rates and inflation have an inverse relationship, the Federal Reserves decision will likely contribute to a higher percentage increase in CPI for the next 2 years. We foresee the CPI will continue to increase by .5%-1% as the prices of goods and services continue to rise. Since YUM relies heavily on sales from its value menu items, the increase in CPI will likely have a negative effect its margins. As prices of goods and services increase, unless YUM increases sale prices, its businesses will profit less from each sale of value menu items. Given that U.S. consumers are highly focused on budgeting their income wisely, it is unlikely that the Company will increase its prices in the U.S., and, as a result, will have to cope with smaller margins for at least the next 2-3 years.

Source: NetAdvantage

Since quick-service restaurants do not have a lot of pricing power, YUM will have difficulty raising prices to offset the cost increases, which may result in margin pressure. YUM can negotiate with suppliers or take a temporary price cut. In addition, Taco Bell, Pizza Hut, and KFC can alter input quantities in certain products to reduce spending on inputs. The Consumer Confidence Index (CCI) The Consumer Confidence Index is a measure of the average consumers current economic outlook and his or her future expectations 15. If consumers are optimistic about the economy, they are more likely to spend their disposable funds on non-essentials, such as eating dinner outside of the home. 28% of surveyed consumers stated that they would seek out cheaper restaurants if they expected an economical decline16. While the economy is slowly recovering, consumers continue to remain wary of the volatile economic state. In the next six months, we predict the CCI to slowly increase, primarily due to holiday spending. In the 2

long-run, the CCI is expected to rebound due predicted slow improvement of economic conditions. The normalization of data that was skewed due to recent announcements about the S&P 500 and US debt ceiling will also slightly raise the Consumer Confidence Index. As illustrated in Figure 4, a slight increase in the Consumer Confidence Index directly affects YUMs sales as consumers will be more likely to choose Taco Bell, KFC, and Pizza Hut, instead of dining at home. If the increase in consumer confidence is higher than expected in the coming years, this may potentially hurt YUM. If consumers are optimistic about the future, they may be less likely to dine at fast-food restaurants and prefer more upscale establishments. Figure 4

from dining at home to quick-service and fast-casual restaurants. Health Consumers are becoming increasingly concerned about the nutritional value of the foods they eat, which is affecting the restaurant industry. In response to the demand for nutritious and low calorie foods, restaurants have been improving their menu items to project a healthy image and stay competitive. Quickservice restaurants have included healthier options to change previous perceptions about fast-food. YUM, specifically, currently offers nutritional brochures available in stores or by company website18. As of 2007, all Taco Bell and KFC restaurants in the U.S. use zero grams of trans fat cooking oil17. Technology The increase in consumer use of technology has affected the restaurant business as well. The restaurant industry has seen an increase in leveraging the internet to make the experience for customers more convenient18. Consumers can now go online to look at nutrition information, view menu items, and order their food before they arrive at the restaurant. There are also applications for smartphones that research calorie counts and nutrition facts. Restaurants are also utilizing technology for advertising on Facebook and other social media outlets. YUMs restaurants, specifically Pizza Hut, offer apps to make the customers experience as fun and convenient as possible. Pizza Huts app allows the customer to order based on nutrition information, previous orders, and most popular menu items. A Growing Demand We anticipate that demand for quick-service restaurants will continue to increase for the rest of 2011 and into 2012 since they have become competent alternatives to full-service restaurants by offering tasty value menu items. YUM has satisfied the increasing demand as KFC, Pizza Hut, and Taco Bell all offer low price value menu options. We also expect a growing demand and increase in sales in the Asian market. China is in an age of explosive growth and Chinese consumer preferences have shifted to affordable, western dining. We expect the Chinese GDP Per Capita to increase to 10,000 by 2020. Such growth, accompanied with the governments urbanization efforts, will increase demand for QSRs. YUM has taken advantage of this growing international market by establishing a number of their brands in China.

Source: Blair Monthly Morsels Report

Industry Analysis With sales of $1.7 billion a day and a 49% share of the food dollar, the restaurant industry is a highly competitive, profitable segment of the service sector. As of November 2011, the restaurant industry has a market cap of $619 billion and displays trends that will continue its success with a focus on health, convenience, and value 17. Because the consumer discretionary industry is cyclical, we expect recent economic conditions to affect the majority of stocks within our investment universe. While YUM and McDonalds target consumers who want quick-service and inexpensive food, Cosi and Panera focus on a consumer base that requires a more distinguished atmosphere but are still considered to be fast-casual. The Cheesecake Factory, Red Robin, and P.F. Changs are sit-down restaurants, and therefore fall into the casual dining category. In the recent economic downturn, we see opportunity for quick-service restaurants like YUM to thrive as consumers begin to budget more income for dining out. We also foresee that it is a good time to invest in the discretionary sector since the expected slight rise in the Consumer Confidence Index will shift consumers

Concentration The restaurant industry contains very few chain and franchised companies and about 48% of small-scale businesses operations with 9 or fewer employees. The concentration has increased slightly due to the recent Wendys and Arbys merger and the private equity acquisition of Burger King19. We expect industry concentration to continue to increase in the next few years and global expansion to play a role in the level of concentration. While competition is high and barriers to entry are low, franchised operations generally compete on a higher level and account for about 65% of total industry revenue19. Food courts and airport establishments are also increasing in popularity, which is likely to increase competition. We conclude YUMs diversified product lines will allow it to prosper despite that increasing market concentration. Profitability Companies in the restaurant industry compete on a cost basis strategy and strive to have higher margins so having effective cost controls is a major key to profitability. Because consumer spending has declined since the recession, pricing is competitive and costs are still high as illustrated in Figure 5, creating a generally low-margin environment19. Figure 5

Company Specific Analysis YUM!, Inc, a Louisville, Kentucky based quick-service restaurant company, franchises and licenses brands like KFC, Pizza Hut, Taco Bell, Long John Silvers, A&W, Pasta Bravo, Wing Street, and East Dawning. Though all of the mentioned brands contribute to YUMs success, KFC, Pizza Hut, and Taco Bell account for the largest share of YUMs overall profit. YUM is one of the leading operators in the quick-service restaurant industry and operates in 110 different countries. Corporate Strategy YUMs corporate strategy encompasses four different goals; build leading brands across China in every significant category, drive aggressive international expansion and build strong brands everywhere, dramatically improve U.S. brand positions, consistency and returns, and drive industry-leading, long-term shareholder and franchisee value 19. As promised in their vision statement, YUM continues its advancement into China and plans to expand beyond the already existing 3700 locations. To continue its international growth, YUM expects to double the number of KFC restaurants in Africa to 1,200. To fortify and improve its brands, the company will develop more healthy choices and alter menu items to suit the time of day. Financial summary YUM continue to improve its financial standing with a 21% third quarter profits increase with sales totaling $3 billion. Further demonstrating YUMs success is its 15% dividend increase in the 2010 fiscal year. YUM plans to continue expanding internationally, which will increase sales.

Source: www.ibisworld.com

International Competition and Markets Globalization in the restaurant industry is low and most companies are not focused on expanding internationally19. Most companies that are competing internationally already have a significant market share domestically. However, companies like YUM, McDonalds, and Burger King are gaining global presence. Emerging markets like India are likely to become YUMs targets for international growth due to their recent growth levels. YUM is currently pursuing expansions into Africa and outside Chinas mainland.

Products and Markets YUM consists of three operating segments: YUM! U.S., YUM! China, and YUM! International 20. YUM is the worlds largest chain restaurant company with nearly 38,000 restaurants in over 110 countries and operations in 5 quick service restaurant categories. KFC, Pizza Hut, and Taco Bell are global leaders of chicken, pizza, and Mexican-style food respectively7. This diverse product mix allows YUM to have a grasp on constantly shifting consumer preferences and remain profitable through exposure in multiple markets.

Figure 6
Operating Profits by Division YUM! US YUM! China YUM! International

competitive advantage in its operating space. Pizza Hut, KFC, and Taco Bell hold 14%, 40%, and 52% of the market share in the U.S. pizza, chicken, and Mexican markets respectively. YUMs varied restaurant concepts allow it to serve a larger customer base by catering to different tastes. International Operations In addition to a strong U.S. presence, these brands are also widely recognized and purchased around the world, especially in China. In 2010, YUM! International opened more than 1400 new restaurants. YUM has a presence in U.S., China, Australia, Taiwan, Canada, Brazil, Singapore, South Africa, United Kingdom, Germany, India, Indonesia, and Vietnam. This international presence allows YUM to uphold its strong brand presence and continue to serve a large, international customer base. One of YUMs strengths is its already large presence in China, an emerging market with a constantly growing consumer base. Currently, there are over 4,000 Pizza Hut and KFC restaurants in more than 700 cities across China. YUM is a pioneer of U.S. fast-food and delivery type restaurants in China. Weaknesses Legal Proceedings YUM is involved in lawsuits that may present the company in an unfavorable light. YUM is accused of breaching the California labor code, failing to reimburse business expenses, and not providing complete vacation pay. In January of 2011, Taco Bell, which accounts for more than 60% of total domestic earnings 22, was accused of using low-grade beef and although the lawsuit was dropped, we expect Taco Bell sales to continue to be negatively impacted into 2011. Opportunities Little Sheep Acquisition In one of the first successful acquisitions of a major Chinese restaurant chain, YUM was recently approved by Chinese antitrust regulators to buy hot-pot restaurant operator Little Sheep Group Ltd. for approximately US$860 million 23. The acquisition will prove beneficial for YUM in the future as it increases its presence in the Chinese market, leaving potential upside to our estimates. Healthy Menu Items Although YUM currently provides some healthy menu items such as Taco Bells Fresco style or KFCs grilled chicken, it has an opportunity to deliver even more items for health-conscious customers. YUM can also appeal to dieting customers by making nutritional information readily available since nearly three in 10 adults or 27% have gone online to search for nutrition information about restaurant food 24. 5

29% 38%

33%

Source: Krause Fund Research

Outside the United States, YUM has opened approximately four new restaurants per day in 2011, becoming a leader in international retail development. KFC is the world's most popular chicken restaurant in its category and the number one quick-service restaurant brand in mainland China today. In order to remain competitive, YUM must continue to focus its marketing efforts on maintaining a vibrant global business by building leading brands across China other international markets. With only a 1% increase in same store sales, YUM must improve U.S. brand positions, consistency, and returns. Taco Bell is currently the second most profitable quick-service brand in the U.S. behind McDonald's. In order to stay competitive with McDonalds, Taco Bell needs to expand its current product lines and add a breakfast menu. If successful, Taco Bell and therefore YUM will gain customers that purchase breakfast, which will increase sales. Competition Because YUM competes in a global market, its main competitors are quick-service franchise chains that are similarly moving into fast-growing international markets. Very few restaurants in the industry are both international and franchised. The McDonalds Corporation, with a current market cap of 92.15 billion, remains a strong U.S. and international competitor. Burger King, Wendys/Arbys and Subway compete with YUM in the United States market as well8. YUM has held on to its market share by consistently increasing its restaurant count and adding more than 650 international restaurants than McDonalds over the past 5 years 21.

Future Prospects Strengths Diversified Product Lines YUM diversified restaurant concepts such as pizza, chicken, and Mexican-style food, give the company a

Frozen Retail Products YUM has an opportunity to fulfill customer desire for convenient food by placing its products in the frozen section of grocery stores. Similar to California Pizza Kitchens frozen pizza, Pizza Hut, Taco Bell, and KFC can redesign some product lines especially for retail store freezers. Putting products into grocery stores will not only increase profits, but also raise brand awareness. Threats Availability of Alternatives YUM has to compete with a large number of similar restaurants both in and outside the U.S. YUM not only has to compete with equally famous brands like McDonalds for customers, but also for real estate and commercial space. Health-conscious Consumers As obesity awareness grows, there is an increasing push to lead a healthier lifestyle. YUM may be threatened by this rising trend because its brands are not perceived as health leaders. YUM has to continue adding healthy alternatives to remain competitive and appeal to a wider range of consumers who now want healthy as well as quick and convenient.

Key Assumptions Revenue Decomposition We broke down YUM revenue by average restaurant unit sales for both franchise and company-owned stores in the United States, China, and YUM International (YRI). Due to the relatively volatile earnings (from a positive 8.33% in 2008, down to a negative 4.14% in 2009, and back up to a 4.68% in 2010), we decided a lower growth rate was relevant for 2011E, and we project a gradual increase in sales up through 2015. We recognize that YUM seems to be focused on adapting a franchise business model in the United States based on historical unit growth so we decreased our forecasted percent change in companyowned units while increasing the number of franchised units domestically. We grew forecasted revenues for the YRI division, but focused growth on the China division, with reasonable but high growth rates of units in China of 13-14% per year for the next 5 years. Beyond 2015, it is likely that YUM will grow at 2%, a rate slightly lower than our predicted U.S. GDP growth, as YUM will not be able to withstand growth higher than the U.S. economy. We forecast sales and franchise fees per store to only increase slightly, as YUM is not likely to increase its prices dramatically given the price sensitivity of its primarily low-income customers. We expect that the slight increases are reasonable given the recognized value of the YUM restaurants. Gross Margin Our gross margin projections for YUM are another important assumption in our valuation model. YUM gross margin has hovered around 27% for the last 3 years. We project that gross margin will increase due to lower payroll and employee benefits costs. Lower payroll and employee benefits costs are based on the assumption that the unemployment rate will remain constant, at most increasing to 9.3%. The high unemployment rate will result in cheap labor for YUM. Furthermore, the company has become more profitable in the past few years as it has been moving into China, and the biggest cost shift has been in payroll (referencing the historical common size income statement). The decrease in costs will be partially offset by predicted increases in food and paper input prices. In the final year of our forecast horizon, we expect the gross margin will reach approximately 30%, and stabilize. We anticipate a continued strong balance sheet and cash flow statement project performance. We included assumptions for dividends, as YUM has consistently paid a dividend since 2004. We also forecast stock repurchases, as we foresee that YUM will also add to stockholder value in this way, utilizing excess cash. In years where there are predicted heightened capital 6

Valuation Analysis Our YUM valuation analysis involved multiple techniques, including the discounted cash flow (DCF) model, the economic profit (EP) model, the fundamental P/E model, the relative valuation P/E ratio and the P/E to growth ratio (PEG). The fundamental P/E model calculated a current target price of $69.19. This price suggests a premium of approximately 26%. The DCF and EP models both returned a value of $63.13. The relative P/E analysis was calculated using earnings estimates for companies in the restaurant industry, and returned an average value of $60.60. We feel that because since 2004 YUM has consistently returned value to shareholders through repurchasing shares and paying dividends, that the fundamental P/E model is relevant. We also expect that the intangible brand loyalty associated with YUM is best reflected in the DCF and EP models. Given company-specific attributes, we are comfortable with the price range produced by the DCF, EP, and fundamental P/E models. The average of the predicted prices of the three models is $66.16, a premium of about 20% over the current stock price. In order to take advantage of future EPS and dividend growth, we recommend investors to buy YUM.

expenditures, we forecast lower stock repurchases. We did not forecast acquisitions, due to uncertainty, though the recent intent to acquire Little Sheep will eventually need to be factored into the future stock price as the acquisition nears completion. Weighted Average Cost of Capital The WACC is a function of both external economic predictions as well as company-specific characteristics that affect risk. By using the Capital Asset Pricing Model (CAPM), we calculated YUM cost of equity. We assumed a risk-free rate equal to the yield of a 30year U.S. Treasury bond, 3.1%, as of November 13, 2011. We used a beta of 0.86, which is calculated using weekly historical averages against the S&P500 over the last 3 years. Our cost of equity assumption is equivalent to 6.81%. The pre-tax cost of debt assumption, 6.88%, is derived from the long-term YUM debt issued that will mature in 26 years (11/15/2037). The current weight of debt is roughly 21%, and is not expected to change significantly at least until 2015. We used a 35% marginal tax rate. Discounted Cash Flow and Economic Profit Models The discounted cash flow (DCF) and economic profit (EP) models project a future stock price of $63.13. This price suggests a 15% upside over the current stock price, utilizing a continuing value growth rate of 2%, slightly lower than our future prediction for GDP. We conclude that the DCF and EP models offer a reasonable future stock price based on the fact that the model highlights intangible intrinsic qualities that we assume to grow in the next five years. Relative P/E and PEG Ratios In our relative P/E and PEG analysis, we compared YUM to eight peer companies within the restaurant industry, based on similar qualities like a strong brand name and similar market capitalization. After calculating the peer P/E ratios, the implied value is $59.76 and $61.41 using 2011E and 2012E P/E values. These prices are lower than the values produced using our other models, and we conclude that this is price discrepancy is because this model does not capture the intrinsic value and company-specific intangible characteristics that the DCF, EP and fundamental P/E models are able to capture. Additionally, YUM has unique initiatives in comparison to its peer firms, and these initiatives are not captured through relative valuation. The peer PEG ratio analysis produces implied values of $64.50 and $67.06. These values are higher than the current stock price and in line with our intrinsic model estimates. YUM five-year growth rate is slightly above

its peers, resulting in a PEG ratio slightly below the peer average. Fundamental P/E When calculating our fundamental P/E analysis we used our EPS estimates from the forecasted income statement and the dividend payout predictions from the cash flow statement. Using the 2% CV growth rate, a proxy for our predicted GDP growth, a CV return on equity (ROE) of 44.55%, and a cost of equity of 6.81%, YUM share price is valued at $69.19. We estimate this number is a good representation of the company since share repurchases and dividend payments have historically been a significant portion of operations. We assume that share repurchases and dividend payments will remain an important part of operations in future, and estimate growth as the company experiences excess cash flow.

Sensitivity Analysis Due to the significant amount of assumptions in our models, it is essential that we test the sensitivity of our final target price to these assumptions. By performing this analysis, we can comfortably select a target range for YUMs stock price. Beta Our sensitivity analysis demonstrates that even if the model used an increased beta of 0.90, the target value of the stock would remain relatively high compared to its current value. At a beta of 0.90, the target price for YUM is $63.11, a 14.14% premium. CV Growth The continuing value growth rate is a critical component as it has a considerable impact on the resulting intrinsic value in our EP, DCF, and DDM valuation models. Using a CV growth rate of 3.00%, the target value of YUM is $75.00. Although YUM has outperformed the market during the recent economic downturn, we conclude that using a 3.00% growth rate is overly optimistic and a 2.00% growth rate, resulting in a target value of $66.16, is most appropriate. WACC Our model calculates a weighted average cost of capital for YUM to be 6.3%. Although the target value of YUM is relatively sensitive to changes in the WACC, we foresee that it is likely to remain around this level with the slow economic recovery and as our debt and equity weights are not expected to change significantly in the next 5 years.

Revenue Growth We anticipate total revenue to grow at 8.19% in FY2015. Even with a modest 6.0% growth rate, the target value for YUM is $60.22, an 8.92% premium. Although with the slow economic recovery and continued success in foreign markets, a more optimistic assumption would have YUMs total revenue growing at 10.0%, resulting in a target value of $71.08. However, we feel that this assumption is overly optimistic as competition continues to increase in foreign markets. Company Restaurant Expenses as a % of Sales For YUM, the FY2015 total company restaurant expenses as a percentage of sales is 70.26%. Although this represents a significant percentage, changes in the value do not have a significant impact on the target value. This lack of sensitivity will reduce the target value impact as YUMs expenses continue to increase due to growth and expansion.

Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Sources 1) Forbes. 2) Trading Economics. http://www.tradingeconomics.com/united-states/gdpgrowth 3) Investopedia Real GDP. http://www.investopedia.com/terms/r/realgdp.asp#axzz 1dYnVMytY 4) South Carolina Department of Employment and Workforce. http://dew.sc.gov/ 5) Huffington Post. http://www.huffingtonpost.com/2011/11/02/federalreserve-gdp-forecast_n_1071987.html 16) Fast Casual http://www.fastcasual.com/article/113013/MarketForce-restaurant-study-reveals-jump-in-consumerconfidence 17) Yahoo! Finance Industry Center. http://biz.yahoo.com/ic/712.html 18) YUM Company Website. http://www.yum.com/company/nutrition.asp 19) YUM Company Website. http://www.YUM!.com/investors/vision_strategy.asp 20) YUM Company Website. http://investors.yum.com 21) YUM! Brands Investor Presentation. 6) Forecasts. http://www.forecasts.org/unemploy.htm 7) Thompson One. http://phx.corporate-ir.net/ 8) Bloomberg. http://www.bloomberg.com/markets/economiccalendar/ 22) Forbes. http://finapps.forbes.com/finapps/BuyHoldSellAnalysi s.do?tkr=YUM 23) Wall Street Journal Online http://online.wsj.com/article/SB100014240529702045 54204577024720189263442.html 24)FranchiseDirect. http://www.franchisedirect.com/foodfranchises/healthf oodrestaurantfranchiseindustryreport/14/265

9) Net Advantage. http://www.netadvantage.standardandpoors.com/NAS App/NetAdvantage/simpleSearchRun.do?ControlNam e=IndustriesSurveySearch 10) Investopedia - CPI. http://www.investopedia.com/terms/c/consumerpricein dex.asp#axzz1dYnVMytY 11) Bureau of Labor and Statistics CPI. ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt 12) Investopedia PPI. http://www.investopedia.com/terms/p/ppi.asp#axzz1d YnVMytY 13) National Restaurant Association. http://www.restaurant.org/pressroom/pressrelease/?id= 1600 14) United States Department of Agriculture. http://www.usda.gov/oce/commodity/wasde/latest.pdf 15) Investopedia. http://www.investopedia.com/articles/05/010604.asp#a xzz1dYnVMytY 9

Yum!BrandsInc
RevenueDecomposition FiscalYearsEndingDec.31

2008 UnitedStates CompanyOwned BeginningofYearUnits EndofYearUnits %ChangeinUnits AverageUnits Sales (inthousands) %ChangeinSales SalesPerUnit %ChangeinSalesPerUnit %ofTotalRevenue Franchised&Licensed BeginningofYearUnits EndofYearUnits %ChangeinUnits AverageUnits FranchiseandLicenseFees %Change FeesPerUnit (Inthousands) %Change %ofTotalRevenue Yum!BrandsInternational(YRI) CompanyOwned BeginningofYearUnits EndofYearUnits %ChangeinUnits AverageUnits Sales (Inthousands) %ChangeinSales SalesPerUnit %ChangeinSalesPerUnit %ofTotalRevenue Franchised&Licensed BeginningofYearUnits EndofYearUnits %ChangeinUnits AverageUnits FranchiseandLicenseFees (Inthousands) %Change FeesPerUnit %Change %ofTotalRevenue ChinaDivision CompanyOwned BeginningofYearUnits EndofYearUnits %ChangeinUnits AverageUnits Sales (Inthousands) %ChangeinSales SalesPerUnit %ChangeinSalesPerUnit %ofTotalRevenue Franchised&Licensed BeginningofYearUnits EndofYearUnits %ChangeinUnits AverageUnits FranchiseandLicenseFees (Inthousands) %Change FeesPerUnit %Change %ofTotalRevenue

2009

2010

2011E

2012E

2013E

2014E

2015E

3896 3314 14.94% 3605 4410 2.39% 1223 9.77% 39.01%

3314 2800 15.51% 3057 3738 15.24% 1223 0.04% 34.50%

2800 2484 11.29% 2642 3355 10.25% 1270 3.85% 29.58%

2484 2236 10.00% 2360 3057 8.89% 1295 2.00% 26.66%

2236 2012 10.00% 2124 2806 8.20% 1321 2.00% 23.38%

2012 1791 11.00% 1901 2562 8.68% 1348 2.00% 20.08%

1791 1594 11.00% 1692 2326 9.22% 1375 2.00% 16.99%

1594 1418 11.00% 1506 2112 9.22% 1402 2.00% 14.26%

16009 16476 1.01% 16243 722 5.56% 44 3.52% 6.39%

16476 16865 2.92% 16671 735 1.80% 44 0.81% 6.78%

16865 17033 2.36% 16949 765 4.08% 45 2.37% 6.74%

17033 17459 2.50% 17246 778 1.75% 45 0.00% 6.79%

17459 17895 2.50% 17677 813 4.46% 46 1.92% 6.78%

17895 18432 3.00% 18164 836 2.75% 46 0.00% 6.55%

18432 18985 3.00% 18709 861 3.00% 46 0.00% 6.29%

18985 19555 3.00% 19270 886 3.00% 46 0.00% 5.99%

1642 1982 20.71% 1812 2657 5.98% 1466 0.45% 23.50%

1982 2000 0.91% 1991 2053 22.73% 1031 29.68% 18.95%

2000 1559 22.05% 1780 2347 14.32% 1319 27.91% 20.69%

2484 1606 3.00% 2045 2601 10.84% 1272 3.55% 22.69%

1606 1654 3.00% 1630 2094 19.50% 1285 1.00% 17.45%

1654 1704 3.00% 1679 2179 4.03% 1298 1.00% 17.07%

1704 1755 3.00% 1729 2266 4.03% 1311 1.00% 16.56%

1755 1807 3.00% 1781 2358 4.03% 1324 1.00% 15.92%

10144 11331 11.70% 10738 675 15.98% 63 6.52% 5.97%

11331 11804 4.17% 11568 660 2.22% 57 9.24% 6.09%

11804 12853 8.89% 12329 741 12.27% 60 5.34% 6.53%

12853 13239 3.00% 13046 784 5.82% 60 0.00% 6.84%

13239 13636 3.00% 13437 808 3.00% 60 0.00% 6.73%

13636 14045 3.00% 13840 844 4.53% 61 1.49% 6.62%

14045 14466 3.00% 14255 870 3.00% 61 0.00% 6.35%

14466 14900 3.00% 14683 896 3.00% 61 0.00% 6.05%

2087 2272 8.86% 2180 2776 33.78% 1274 18.13% 24.56%

2272 2866 26.14% 2569 3622 30.48% 1410 10.69% 33.43%

2866 3228 12.63% 3047 4081 12.67% 1339 5.00% 35.98%

2484 3648 13.00% 3066 4188 2.63% 1366 2.00% 36.53%

3648 4122 13.00% 3885 5413 29.25% 1393 2.00% 45.11%

4122 4699 14.00% 4410 6269 15.80% 1421 2.00% 49.12%

4699 5357 14.00% 5028 7289 16.28% 1450 2.00% 53.25%

5357 6107 14.00% 5732 8476 16.28% 1479 2.00% 57.23%

253 96 62.06% 175 64 7.25% 367 26.77% 0.57%

96 118 22.92% 107 60 6.25% 561 52.89% 0.55%

118 153 29.66% 136 54 10.00% 399 28.93% 0.48%

153 176 15.00% 164 58 6.60% 350 12.18% 0.50%

176 194 10.00% 185 66 14.57% 357 2.00% 0.55%

194 203 5.00% 198 72 9.53% 364 2.00% 0.57%

203 213 5.00% 208 77 7.10% 371 2.00% 0.57%

213 224 5.00% 219 83 7.10% 379 2.00% 0.56%

TotalWorldwideUnits %AnnualGrowth Unallocatedfees TotalWorldwideRevenue (inthousands) %AnnualGrowth

35471 4.23% 0

36453 2.77% 32

37310 2.35% 0

38362 2.82% 0

39512 3.00% 0

40873 3.44% 0

42370 3.66% 0

44011 3.87% 0

$11,304 $10,836 $11,343 $11,466 $12,000 $12,761 $13,689 $14,810 8.33% 4.14% 4.68% 1.09% 4.65% 6.34% 7.27% 8.19%

Yum!BrandsInc
IncomeStatement FiscalYearsEndingDec.31 AllNumbersinMillions 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 11304 10836 11343 11466 12000 12761 13689 14810 TotalSales/Revenue 3239 3003 3091 3215 3408 3680 4048 4655 Foodandpaper 2370 2154 2172 2174 2131 2088 2067 2069 PayrollandEmployeeBenefits Occupancyandotheroperatingexpenses 2856 2777 2857 3000 3150 3307 3473 3681 TotalCompanyRestaurantExpenses 8465 7934 8120 8389 8688 9076 9588 10406 GrossProfit 2839 2902 3223 3078 3312 3686 4101 4404 SG&AExpense 786 641 688 712 760 742 666 631 Depreciation 542 553 565 546 498 518 594 629 AmortizationofIntangibleAssets 14 27 24 21 21 22 22 22 Franchiseandlicenseexpenses 99 118 110 100 90 96 110 133 Closuresandimpairment(income)expenses 43 103 47 49 58 57 60 63 Otherexpenses(income)nonrecurring 162 130 20 89 90 72 58 77 OperatingIncome(Loss) 1517 1590 1769 1739 1975 2324 2707 3001 InterestExpense,net 226 194 175 247 274 202 166 165 IncomebeforeTaxes 1291 1396 1594 1492 1701 2122 2541 2836 IncomeTaxProvision 319 313 416 388 442 552 661 737 NetIncomeincludingnoncontrollinginterest 972 1083 1178 1104 1259 1570 1881 2099 NetIncomenoncontrollinginterest 8 12 20 15 15 15 15 15 NetIncomeYUM!Brands,Inc $ 964 $ 1,071 $ 1,158 $ 1,089 $ 1,244 $ 1,555 $ 1,866 $ 2,084 EPS(basic) CommonStockOutstanding(inmillions) $ 2.03 459 $ 2.28 469 $ 2.44 $2.37 $2.70 $3.36 $4.06 $4.56

469 460 461 463 460 457

Yum!BrandsInc
BalanceSheet FiscalYearsEndingDec.31 AllNumbersinMillions 2008 Assets Cash&cashequivalents AccountsReceivables,Net Inventories PrepaidExpensesandothercurrentassets DeferredIncomeTaxes Advertisingcooperativeassets,restricted Shortterminvestments TotalCurrentAssets NetProperty,Plant&Equipment LTInvestmentAffiliateCompanies IntangibleAssets Goodwill NetOtherIntangibles DeferredTaxAssets Otherassets TotalAssets Liabilities&Shareholders'Equity STDebt&Curr.PortionLTDebt AccountsPayable OtherCurrentLiabilities IncomeTaxPayable TotalCurrentLiabilities LongTermDebt Otherliabilitiesanddeferredcredits TotalLiabilities CommonStock TreasuryStock RetainedEarnings Accum.Othercomprehensiveloss TotalShareholders'EquityYUM!Brands,Inc. Noncontrollinginterest TotalShareholders'Equity Liabilities&Shareholders'Equity 216 229 143 172 81 110 951 3,710 65 940 605 335 300 561 6,527 2009 353 239 122 314 81 99 1,208 3,899 144 1,102 640 462 251 544 7,148 2010 1,426 256 189 269 61 112 2,313 3,830 154 1,134 659 475 366 519 8,316 2011E 1,466 282 208 296 148 113 0 2,513 3,982 153 1,247 659 588 319 571 8,785 2012E 500 310 229 325 169 118 0 1,652 4,567 160 1,372 659 713 364 420 8,535 2013E 288 313 274 358 211 126 0 1,570 4,842 171 1,509 659 850 454 510 9,056 2014E 780 344 329 394 252 135 0 2,235 4,878 183 1,660 659 1,001 544 548 10,047 2015E 1,330 379 395 433 281 146 0 2,965 5,272 198 1,826 659 1,167 607 592 11,460

25 508 1,075 114 1,722 3,564 1,349 6,635 7 0 303 418 108 0 108 6,527

59 499 1,006 89 1,653 3,207 1,174 6,034 253 0 996 224 1,025 89 1,114 7,148

673 540 1,154 81 2,448 2,915 1,284 6,647 86 0 1,717 227 1,576 93 1,669 8,316

653 563 1,106 96 2,417 3,327 1,310 7,054 186 800 2,479 227 1,638 93 1,731 8,785

268 589 1,158 109 2,123 2,674 1,336 6,133 285 1,100 3,350 227 2,308 93 2,401 8,535

5 626 1,231 136 1,998 2,406 1,363 5,767 385 1,400 4,439 227 3,197 93 3,290 9,056

6 672 1,320 163 2,161 2,401 1,390 5,952 485 2,000 5,745 227 4,002 93 4,095 10,047

257 727 1,429 182 2,594 2,395 1,418 6,407 584 2,600 7,203 227 4,960 93 5,053 11,460

Yum!BrandsInc
HistoricalCashFlowStatement FiscalYearsEndingDec.31 AllNumbersinMillions 2006 OperatingActivities: NetIncomebeforeExtraordinaries Depreciation&Amortization DeferredTaxes&InvestmentTaxCredit OtherFunds FundsfromOperations ChangesinWorkingCapital NetOperatingCashFlow InvestingActivities: CapitalExpenditures NetAssetsfromAcquisitions SaleofFixedAssets&Businesses Purchase/SaleofInvestments OtherFunds NetInvestingCashFlow FinancingActivities: CashDividendsPaid RepurchaseofCommon&PreferredStk. SaleofCommon&PreferredStock ChangeinCapitalStock Issuance/ReductionofDebt,Net OtherFunds NetFinancingCashFlow ExchangeRateEffect NetChangeinCash ChangeinCashandCashEquivalentsdueto consolidationofentitiesinChina TotalChangeinCash 824 479 30 77 1,350 48 1,302 2007 909 542 95 1 1,355 212 1,567 2008 964 556 1 113 1,408 113 1,521 2009 1,083 580 72 279 1,456 52 1,404 2010 1,158 589 110 48 1,685 283 1,968

614 7 57 139 227 476

742 0 56 134 120 432

935 0 72 0 222 641

797 24 34 115 175 727

796 0 33 62 246 579

144 983 142 841 252 60 673 8 161

273 1,410 112 1,298 831 62 678 13 470

322 1,628 72 1,556 375 44 1,459 11 590 17 573

362 0 113 113 332 39 542 15 120 17 137

412 371 102 269 313 31 337 21 1,073

161

470

1,073

Yum!BrandsInc
CashFlowStatement FiscalYearsEndingDec.31 AllNumbersinMillions 2011E OperatingActivities: NetIncome Adjustmentstoreconcilenetincome: Add:Depreciation Add:AmortizationofIntangibleAssets ChangesinWorkingCapital: Increaseinreceivables Increaseininventories Increaseinaccountspayable Increaseinincometaxpayable Increaseinprepaidexpenses/othercurrentassets Increaseinadvertisingcooperativeassets,restricted Increase(decrease)indeferredtaxes Increaseinotherliabilities Increaseinotherassets NetOperatingCashFlow InvestingActivities: (Increase)decreaseinshortterminvestments (Increase)decreaseinLTInvestmentAffiliateCompanies CapitalExpenditures Capitalizationofintangibleassets OtherFunds NetInvestingCashFlow FinancingActivities: Paymentsoflongtermdebt Paymentsofshorttermdebt Paymentsofdividends ShareRepurchases Proceedsfromissuanceofcommonstock NetFinancingCashFlow ExchangeRateEffect NetChangeinCash ChangeinCashandCashEquivalentsduetoconsolidationof entitiesinChina TotalChangeinCash 1,089 546 21 26 19 23 15 27 1 40 22 52 1,506 2012E 1,244 498 21 28 21 26 13 30 5 65 78 151 1,882 2013E 1,555 518 22 3 46 37 27 33 8 132 100 90 1,948 2014E 1,866 594 22 31 55 46 27 36 9 131 117 37 2,371 2015E 2,084 629 22 34 66 55 19 39 11 92 136 45 2,658

0 1 698 134 831

0 7 1,083 146 1,236

0 10 793 159 962

0 12 629 173 815

0 15 1,023 189 1,227

412 20 327 800 100 635 0 40 0 40

653 385 373 300 100 1,612 0 966 0 966

268 263 467 300 100 1,198 0 212 0 212

5 1 560 600 100 1,064 0 492 0 492

6 251 625 600 100 880 0 550 0 550

Yum!BrandsInc
CommonSizeBalanceSheet FiscalYearsEndingDec.31

2008 Assets Cash&cashequivalents TotalShortTermInvestments AccountsReceivables,Net Inventories PrepaidExpensesandothercurrentassets DeferredIncomeTaxes Advertisingcooperativeassets,restricted Shortterminvestments TotalCurrentAssets NetProperty,Plant&Equipment LTInvestmentAffiliateCompanies IntangibleAssets Goodwill NetOtherIntangibles DeferredTaxAssets Otherassets TotalAssets Liabilities&Shareholders'Equity STDebt&Curr.PortionLTDebt AccountsPayable DividendsPayable AccruedPayroll MiscellaneousCurrentLiabilities OtherCurrentLiabilities IncomeTaxPayable TotalCurrentLiabilities LongTermDebt Otherliabilitiesanddeferredcredits TotalLiabilities CommonStock RetainedEarnings TreasuryStock Accum.Othercomprehensiveloss TotalShareholders'EquityYUM!Brands,Inc. Noncontrollinginterest TotalShareholders'Equity Liabilities&Shareholders'Equity 3.31% 0.00% 3.51% 2.19% 2.64% 1.24% 1.69% 0.00% 14.57% 56.84% 1.00% 16.08% 9.27% 5.13% 4.60% 8.60% 100.00%

2009 4.94% 0.08% 3.34% 1.71% 4.39% 1.13% 1.39% 0.00% 16.90% 54.55% 2.01% 16.67% 8.95% 6.46% 3.51% 7.61% 100.00%

2010 17.15% 0.18% 3.08% 2.27% 3.23% 0.73% 1.35% 0.00% 27.81% 46.06% 1.85% 19.97% 7.92% 5.71% 4.40% 6.24% 100.00%

2011E 16.69% 0.00% 3.21% 2.37% 3.37% 1.68% 1.26% 0.00% 28.60% 45.32% 2.02% 14.20% 7.50% 6.70% 3.63% 6.50% 100.00%

2012E 5.86% 0.00% 3.63% 2.68% 3.81% 1.98% 1.26% 0.00% 19.86% 53.51% 2.02% 16.08% 7.72% 8.36% 4.26% 4.92% 100.00%

2013E 3.18% 0.00% 3.45% 3.03% 3.95% 2.32% 1.26% 0.00% 18.88% 53.47% 2.02% 16.67% 7.28% 9.39% 5.01% 5.64% 100.00%

2014E 7.77% 0.00% 3.43% 3.28% 3.92% 2.51% 1.26% 0.00% 26.87% 48.55% 2.02% 16.53% 6.56% 9.97% 5.41% 5.45% 100.00%

2015E 11.61% 0.00% 3.30% 3.45% 3.78% 2.45% 1.26% 0.00% 35.65% 46.00% 2.02% 15.94% 5.75% 10.19% 5.29% 5.17% 100.00%

0.38% 7.78% 1.33% 5.76% 9.38% 16.47% 1.75% 26.38% 54.60% 20.67% 101.65% 0.11% 4.64% 6.40% 1.65% 0.00% 1.65% 100.00%

0.83% 6.98% 1.37% 4.78% 7.92% 14.07% 1.25% 23.13% 44.87% 16.42% 84.42% 3.54% 13.93% 3.13% 14.34% 1.25% 15.58% 100.00%

8.09% 6.49% 1.42% 4.29% 8.16% 13.88% 0.97% 29.44% 35.05% 15.44% 79.93% 1.03% 20.65% 2.73% 18.95% 1.12% 20.07% 100.00%

7.43% 6.40% 0.00% 4.12% 0.00% 12.59% 1.09% 27.52% 37.87% 14.91% 80.30% 2.11% 9874.74% 22700.00% 18.65% 1.06% 19.70% 100.00%

3.14% 6.90% 0.00% 4.37% 0.00% 13.56% 1.28% 24.88% 31.33% 15.65% 71.86% 3.34% 52276.04% 22700.00% 27.05% 1.09% 28.14% 100.00%

0.06% 6.91% 0.00% 4.24% 0.00% 13.59% 1.50% 22.06% 26.57% 15.05% 63.68% 4.25% 54172.98% 22700.00% 35.30% 1.03% 36.32% 100.00%

0.06% 6.69% 0.00% 3.93% 0.00% 13.14% 1.62% 21.51% 23.90% 13.83% 59.24% 4.82% 28170.16% 22700.00% 39.83% 0.93% 40.76% 100.00%

2.24% 6.34% 0.00% 3.55% 0.00% 12.47% 1.59% 22.64% 20.90% 12.37% 55.90% 5.10% 33284.89% 22700.00% 43.28% 0.81% 44.10% 100.00%

Yum!BrandsInc
CommonSizeIncomeStatement FiscalYearsEndingDec.31

2008 2009 2010 2011E 2012E 2013E 2014E 2015E TotalSales/Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Foodandpaper 28.65% 27.71% 27.25% 28.04% 28.40% 28.84% 29.57% 31.43% PayrollandEmployeeBenefits 20.97% 19.88% 19.15% 18.96% 17.76% 16.36% 15.10% 13.97% Occupancyandotheroperatingexpenses 25.27% 25.63% 25.19% 26.16% 26.25% 25.92% 25.37% 24.86% TotalCompanyRestaurantExpenses 74.88% 73.22% 71.59% 73.16% 72.40% 71.12% 70.04% 70.26% GrossProfit 25.12% 26.78% 28.41% 26.84% 27.60% 28.88% 29.96% 29.74% SG&AExpense 6.95% 5.92% 6.07% 6.21% 6.34% 5.81% 4.87% 4.26% Depreciation 4.79% 5.10% 4.98% 4.76% 4.15% 4.06% 4.34% 4.25% AmortizationofIntangibleAssets 0.12% 0.25% 0.21% 0.18% 0.18% 0.17% 0.16% 0.15% Franchiseandlicenseexpenses 0.88% 1.09% 0.97% 0.87% 0.75% 0.75% 0.80% 0.90% Closuresandimpairment(income)expenses 0.38% 0.95% 0.41% 0.43% 0.48% 0.45% 0.44% 0.43% Otherexpenses(income)nonrecurring 1.43% 1.20% 0.18% 0.77% 0.75% 0.57% 0.42% 0.52% OperatingIncome(Loss) 13.42% 14.67% 15.60% 15.16% 16.46% 18.21% 19.78% 20.27% InterestExpense,net 2.00% 1.79% 1.54% 2.15% 2.28% 1.58% 1.21% 1.12% IncomebeforeTaxes 11.42% 12.88% 14.05% 13.01% 14.18% 16.63% 18.57% 19.15% IncomeTaxProvision 2.82% 2.89% 3.67% 3.38% 3.69% 4.32% 4.83% 4.98% NetIncomeincludingnoncontrollinginterest 8.60% 9.99% 10.39% 9.63% 10.49% 12.31% 13.74% 14.17% NetIncomenoncontrollinginterest 0.07% 0.11% 0.18% 0.13% 0.12% 0.12% 0.11% 0.10% NetIncomeYUM!Brands,Inc 8.53% 9.88% 10.21% 9.50% 10.36% 12.19% 13.63% 14.07%

Yum!BrandsInc
WeightedAverageCostofCapital(WACC)Estimation CostofEquity: RiskfreeRate Riskpremium Beta CostofEquity CostofDebt: PreTaxCost MarginalTaxRate CostofDebt TargetWeights: Debt Equity Total WeightofDebt WeightofEquity

3.10% 4.34% 0.86 6.81%

6.88% 35.00% 4.47%

7051 25133 32185 21.91% 78.09%

21.91% 78.09%

WACC

6.3%

Yum!BrandsInc
ValueDriverEstimation FiscalYearsEndingDec.31

2008 NOPLAT: EBITA: Revenue Less:Foodandpaper Less:PayrollandEmployeeBenefits Less:Occupancyandotheroperatingexpenses Less:SG&AExpense Less:Franchiseandlicenseexpenses Less:Closuresandimpairmentexpenses EBITA Less:AdjustedTaxes IncomeTaxProvision InterestExpense,net IncomeTaxRate AdjustedTaxes DeferredTaxAssets NOPLAT InvestedCapital: NOWC: CompanySales Cash&cashequivalents AccountsReceivables,Net Inventories PrepaidExpensesandothercurrentassets Advertisingcooperativeassets,restricted Less:AccountsPayable Less:AccruedPayroll Less:IncomeTaxPayable NetOperatingWorkingCapital Plus:NetPPE Plus:PVofOperatingLeases Plus:NetOtherIntangibles Plus:Otherassets Less:Otherliabilitiesanddeferredcredits InvestedCapital

2009

2010

2011E

2012E

2013E

2014E

2015E

11304 3239 2370 2856 1342 99 43 1355.00

10836 3003 2154 2777 1221 118 103 1460.00

11343 3091 2172 2857 1277 110 47 1789.00

11466 3215 2174 3000 1278 100 49 1650.20

12000 3408 2131 3150 1280 90 58 1884.57

12761 3680 2088 3307 1281 96 57 2252.17

13689 4048 2067 3473 1282 110 60 2649.48

14810 4655 2069 3681 1283 133 63 2924.20

319 226 35% 398.10 381.0 936.90

313 194 35% 380.90 332.0 1128.10

416 175 35% 477.25 427.0 1216.75

388 247 35% 474.26 467.1 1135.82

442 274 35% 538.05 532.6 1281.08

552 202 35% 622.53 664.4 1497.84

661 166 35% 718.78 795.7 1799.40

737 165 35% 795.24 887.8 2036.79

11304 226 229 143 172 110 508 376 114 118 3710 3085 335 561 1349 6,224

10836 217 239 122 314 99 499 342 89 61 3899 3237 462 544 1174 7,029

11343 227 256 189 269 112 540 357 81 75 3830 3463 475 519 1284 7,078

11466 229 282 208 296 113 563 362 96 108 3982 3533 588 571 1310 7,472

12000 240 310 229 325 118 589 373 109 152 4567 3603 713 420 1336 8,119

12761 255 313 274 358 126 626 384 136 181 4842 3675 850 510 1363 8,696

13689 274 344 329 394 135 672 395 163 246 4878 3749 1001 548 1390 9,032

14810 296 379 395 433 146 727 407 182 334 5272 3824 1167 592 1418 9,772

Yum!BrandsInc
ValueDriverEstimation FiscalYearsEndingDec.31

2008 ROIC: NOPLATt Divide:InvestedCapital(t1) ROIC EconomicProfit: InvestedCapital(t1) Multiply: ROIC Less:WACC EconomicProfit FCF: NOPLAT Less:ChangeinInvestedCapital FCF 937 5987 15.65%

2009 1128 6224 18.12%

2010 1217 7029 17.31%

2011E 1136 7078 16.05%

2012E 1281 7472 17.15%

2013E 1498 8119 18.45%

2014E 1799 8696 20.69%

2015E 2037 9032 22.55%

5987 15.65% 6.30% 560

6224 18.12% 6.30% 736

7029 17.31% 6.30% 774

7078 16.05% 6.30% 690

7472 17.15% 6.30% 810

8119 18.45% 6.30% 986

8696 20.69% 6.30% 1251

9032 22.55% 6.30% 1468

937 237 700

1128 804 324

1217 50 1167

1136 394 742

1281 647 634

1498 577 921

1799 336 1464

2037 739 1297

Yum!BrandsInc
DiscountedCashFlow(DCF)ValuationModel FiscalYearsEndingDec.31

KeyInputs: CVGrowth CVROIC WACC CostofEquity

2.0% 22.55% 6.30% 6.81% 2011E 2012E 2013E 2014E 2015E

DCFModel: NOPLAT ChangeinInvestedCapital ROIC NOPLAT Less:ChangeinInvestedCapital FCF CV CFtoDiscount PeriodstoDiscount DiscountFactor PV(CF) ValueofOperatingAssets ExcessCash ShortTermInvestments LongTermInvestments OtherIntangibleAssets,net Less:LongtermDebt Less:OtherlongtermLiabilities Less:PVOperatingLeases Less:EmployeeStockOptions ValueofEquity PartialYearAdjustment 11/28/2011 SharesOutstanding IntrinsicValueofStock 37001 1199 0 154 475 3588 1284 3463 1344 29150.08 0.91 30815 460 63.31

1136 7472 16.05% 1136 394 742

1281 8119 17.15% 1281 647 634

1498 8696 18.45% 1498 577 921

1799 9032 20.69% 1799 336 1464

2037 9772 22.55% 2037 739 1297 43190 43190 4 1.28 33829

742 1 1.06 698

634 2 1.13 561

921 3 1.20 767

1464 4 1.28 1146

Yum!BrandsInc
EconomicProfit(EP)ValuationModel FiscalYearsEndingDec.31

KeyInputs: CVGrowth CVROIC WACC CostofEquity

2.0% 22.55% 6.30% 6.81% 2011E 2012E 2013E 2014E 2015E

EPMethod: NOPLAT Beg.IC ROIC WACC EP CV(t=6) Beg.IC EP PeriodstoDiscount DiscountFactor PVofEP 7078

1136 7078 16.05% 6.30% 690

1281 7472 17.15% 6.30% 810

1498 8119 18.45% 6.30% 986

1799 8696 20.69% 6.30% 1251

2037 9032 22.55% 6.30% 1468 34117

29886

690 1 1.06 649 1.06

810 2 1.13 717 1.13

986 3 1.20 821 1.20

1251 4 1.28 980 1.28

1468 4 1.28 26719 1.28

ValueofOperatingAssets ExcessCash ShortTermInvestments LongTermInvestments OtherIntangibleAssets,net Less:LongtermDebt Less:OtherlongtermLiabilities Less:PVOperatingLeases Less:EmployeeStockOptions ValueofEquity PartialYearAdjustment 11/15/2011 SharesOutstanding IntrinsicValueofStock

36964 1199 0 154 475 3588 1284 3463 1364 29093.12 0.87 30689 461 63.17

Yum!BrandsInc
DividendDiscountModel(DDM)orFundamentalP/EValuationModel FiscalYearsEndingDec.31

2010 EPS EPSGrowth KeyAssumptions CVgrowth CVROE CostofEquity FutureCashFlows P/EMultiple EPS(nextperiod) FutureStockPrice DividendsPerShare PeriodstoDiscount DiscountedCashFlows IntrinsicValue $2.44

2011E $2.37 3%

2012E $2.70 12%

2013E $3.36 20%

2014E $4.06 17%

2015E $4.56 11%

CV $4.56

2.00% 45.55% 6.81%

19.87 $4.56 $90.57 $0.71 1 $0.81 2 $1.01 3 $1.22 4 $1.37 5 $90.57 5

$ 0.66 $ 0.71 $ 0.83 $ 0.94 $ 0.98 $ 65.15 $ 69.27

Yum!BrandsInc
RelativeP/EAnalysis

Ticker MCD DRI CMG SONC PNRA KKD JACK DPZ

Company McdonaldSCorp DardenRestaurantsInc ChipotleMexicanGrillInc SonicCorp PaneraBreadCo KrispyKremeDoughnutsInc JackInTheBoxInc DominosPizzaInc

Price $ 93.78 $ 46.16 $ 310.47 $ 6.94 $ 138.92 $ 6.70 $ 19.93 $ 31.20

EPS EPS 2011E 2012E P/E11 $5.10 $5.71 18.4 $3.38 $4.29 13.7 $6.42 $8.60 48.4 $0.31 $0.65 22.4 $4.58 $5.32 30.3 $0.26 $0.65 25.8 $1.62 $0.65 12.3 $1.58 $1.88 19.7 Average 23.9 $2.37 $2.70 23.1

P/E12 17.9 12.0 40.9 11.8 30.1 11.8 34.6 18.3 22.2 20.2

Est. 5yrGr. 9.02 11.78 13.21 10.24 15.4 14.4 12.7 10.0 12.09

PEG11 2.04 1.16 3.66 2.19 1.70 1.79 0.97 1.97 1.9

PEG12 1.99 1.02 3.09 1.15 1.96 0.82 2.72 1.83 1.8 1.5

YUM

Yum!BrandsInc

$ 54.59

13.31 1.7

ImpliedValue: RelativeP/E(EPS11) RelativeP/E(EPS12) PEGRatio(EPS11) PEGRatio(EPS12)

$56.46 $ 59.76 $ 60.91 $ 65.36

Yum!BrandsInc
SensitivityAnalysis

Beta $66.16 1.00% 1.33% 1.66% CVGrowth 2.00% 2.33% 2.66% 3.00% 0.70 71.47 73.51 75.88 78.76 82.09 86.13 91.29 0.75 67.67 69.54 71.69 74.29 77.28 80.87 85.41 0.80 64.19 65.91 67.87 70.23 72.92 76.13 80.14 0.86 60.39 61.94 63.71 66.16 68.20 71.01 74.50 0.90 58.06 59.51 61.16 63.11 65.32 67.91 71.09 0.95 55.34 56.68 58.19 59.98 61.99 64.33 67.18 1.0 52.81 54.05 55.45 57.09 58.92 61.04 63.61 $66.16 6.00% 7.00% 8.00% 8.19% 9.00% 10.00% 11.00% 60.00% 61.49 64.22 66.95 67.46 69.67 72.40 75.12

RevenueGrowth

TotalCompanyExpensesasa%ofSales 63.33% 66.66% 70.26% 73.33% 76.66% 61.08 60.67 60.22 59.84 59.43 63.80 63.39 62.94 62.55 62.13 66.53 66.10 65.65 65.26 64.84 67.04 66.62 66.16 65.78 65.36 69.25 68.82 68.36 67.97 67.55 71.97 71.54 71.08 70.68 70.25 74.69 74.26 73.79 73.39 72.96

80.00% 59.01 61.72 64.42 64.93 67.12 69.82 72.53

$66.16 1.00% 1.33% 1.66% CVGrowth 2.00% 2.33% 2.66% 3.00%

4.00% 89.91 96.32 104.53 115.82 131.19 154.11 193.56

5.00% 73.07 76.25 80.06 84.87 90.70 98.18 108.46

6.00% 62.99 64.81 66.90 69.42 72.31 75.77 80.13

WACC 6.30% 60.71 62.28 64.06 66.16 68.60 71.45 74.98

7.00% 56.29 57.42 58.69 60.17 61.82 63.71 65.99

8.00% 51.53 52.27 53.09 54.03 55.04 56.19 57.52

9.00% 47.97 48.48 49.03 49.65 50.32 51.05 51.89

$66.16 1.00% 1.33% 1.66% CVGrowth 2.00% 2.33% 2.66% 3.00%

16.00% 60.10 61.41 62.91 64.70 66.73 69.12 72.08

18.00% 60.33 61.74 63.34 65.26 67.43 70.00 73.18

20.00% 60.51 61.99 63.69 65.71 68.00 70.70 74.05

CVROIC 22.55% 60.69 62.25 64.04 66.16 68.57 71.41 74.94

24.00% 60.78 62.38 64.20 66.38 68.84 71.75 75.36

26.00% 60.89 62.53 64.40 66.63 69.17 72.16 75.86

28.00% 60.98 62.65 64.57 66.86 69.45 72.51 76.30

YumBrandsInc
KeyManagementRatios FiscalYearsEndingDec.31

2011E LiquidityRatios CurrentRatio QuickRatio ActivityorAssetManagementRatios InventoryTurnoverRatio ReceivablesTurnover FinancialLeverageRatios DebttoEquityRatio DebtRatio ProfitabilityRatios Grossprofitmargin ReturnonAssets ReturnonEquity PayoutPolicyRatios DividendYield DividendRatio

2012E

2013E

2014E

2015E

1.04 0.72

0.78 0.38

0.79 0.30

1.03 0.52

1.14 0.66

42.27 40.72

39.80 38.74

36.08 40.79

31.76 39.78

28.73 39.12

2.30 0.45

1.23 0.34

0.73 0.27

0.59 0.24

0.52 0.23

26.84% 12.74% 64.06%

27.60% 14.36% 60.20%

28.88% 17.68% 54.66%

29.96% 19.53% 50.53%

29.74% 19.38% 45.55%

1.30% 0.30

1.48% 0.30

1.85% 0.30

2.23% 0.30

2.50% 0.30