Yum! Brands (NYSE:YUM) seems to be on the right track. The recent E. coli scare at Taco Bell hurt the company's most recent earnings, but on the whole, the fourth-quarter and full-year 2006 results looked downright tasty.

I last looked at the company shortly after its analyst meeting, and I was hoping that the E. coli uncertainty would lower this well-managed, reasonably valued company's shares to bargain prices. Alas, it didn't quite happen.

For the full year, I found it especially impressive that Yum! could leverage cost containments and a 2% revenue increase into a 9% hike in operating earnings. From there, a lower tax rate and share repurchases from restaurant refranchising allowed Yum! to increase earnings per share by 14%, to $2.92 a share, from $2.55 a share last year.

A slightly deeper look shows that China and Yum!'s other international operations drove that increase, as the U.S. struggled. Given competition from Domino's Pizza (NYSE:DPZ), Papa John's (NYSE:PZZA), McDonald's (NYSE:MCD), and Wendy's International (NYSE:WEN), that's not a huge surprise. For next year -- if not the next few years -- Yum! expects this dynamic to continue, with international operations driving profit growth by 10% internationally and 20% in China, but only 5% in the United States.

Unlike most companies, Yum! is focused on metrics such as free cash flow and return on invested capital. However, it's not always smart to take a company's estimate of free cash flow for granted when you're trying to value it. In this case, Yum! states that it had $1.1 billion in free cash flow in the past year, including money from refranchising restaurants. For Yum!'s purposes, this is an accurate representation of the cash available to shareholders and the business this year. But the funds from refranchising aren't a recurring stream, and they shouldn't be used for valuation. That said, I think Yum! did right by using most of this bonus cash to repurchase shares, returning value to shareholders.

With the caveat on free cash flow aside, I think Yum! is a savory investment that easily merits a rough valuation of $70 a share. Factor in likely share repurchases over the next couple of years, the potential for a slight margin increase, and the mix between expansion and maintenance capital expenditures, and you could conceivably bump that value even higher. However, given Yum! Brands' risks from competition and other factors, I think playing it conservative is a smart move. With that value, and its 2% yield, Yum! is attractive enough as is.

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At the time of publication NathanParmelee had no financial interest in any of the companies mentioned. He was ranked 84th out of 22,530 CAPS investors. The Motley Fool has an ironclad disclosure policy.