Yum Brands (YUM) dropped hard at Thursday’s open after the company announced that same-store sales at its KFC and Pizza Hut locations in China dropped 13% in the third quarter thanks to negative publicity surrounding its former supplier’s food handling practices.

YUM stock actually recovered from those losses by the end of the day, but the real damage was actually done back in July, when it lost 14% as a result of the latest scandal.

Yum Brands, as you might’ve guessed, relies heavily on its business in China. So, thanks to several food-related problems in that country that first came to light in December 2012, YUM stock is up just 10% at a time when the SPDR S&P 500 ETF (SPY) achieved a total return of 46%.

Should investors be steering clear of YUM stock at this point, or is this simply a tempest in a teapot? An argument can be made on both sides of the coin.

Let’s see whether you should be heads or tails on YUM stock.

Yum Brands – Great Results Aplenty

Take a close look at YUM’s Q2 results. I think you’ll see that there’s a lot to like about its business at the moment.

For instance, its operating profit in China increased by 188% to $194 million in the quarter and by 116% for the first six months of 2014 to almost $500 million.

China delivers almost half of Yum Brands’ operating profit and more than half of its revenue.

In terms of restaurant margins, YUM managed to deliver 15.5% worldwide, an increase of three percentage points year-over-year leading to a 34% increase in operating profits. Broken down by segment, it wasn’t China that won the day, but rather its the company’s Bell division, which generated restaurant margins of 17.7% — 90 basis points higher than China operations.

However, Taco Bell’s margin, although robust, was 270 basis points lower year-over-year while China’s at 16.8% was an increase of 620 basis points. There’s no denying China’s the growth driver for Yum Brands.

But the good news in the second quarter wasn’t just confined to China. Both KFC and Taco Bell had positive same-store sales growth in Q2, along with increased operating profits. Together, the two units accounted for 51% of Yum Brands’ overall operating profit in the quarter on 37% of the revenue. Even Pizza Hut, which saw margins drop dramatically in the quarter, was able to deliver good news in most of its markets except the U.S., which just happens to account for 55% of its system sales.

At the end of the day, the first six months of the year have been good for Yum Brands. With revenues up 9% year-over-year and a 20% increase in operating profits, it’s not hard to see why CEO David Novak believes it can maintain double-digit EPS in 2015 and beyond.

The next two quarters will be severely challenging for YUM stock given the same-store sales swoon in China but he seems confident that Yum Brands can ride it out.

Yum Brands – Steer Clear

The company’s China division in Q2 2012 generated an operating profit of $182 million on total revenues of $1.56 billion. In the same quarter a year later — thanks to the Avian flu crisis and more food safety woes — Yum Brands saw operating profits in China decline by 63% to $68 million on $1.45 billion in revenues. A 7% decline in year-over-year revenues (let’s not forget a 20% drop in same-store sales) caused this 63% decline in operating profits.

What can we expect for Q3?

In last year’s third quarter, China delivered a $335 million operating profit on revenues of $2.03 billion, which translates into an operating margin of 16.5%. Using the numbers from the previous paragraph as guidance, I estimate that revenues for China in Q3 2014 will come in at $1.94 billion with an operating profit of $199 million.

Now, I’m no analyst, but that’s a heck of a decline.

For the entire company, that means Yum Brands isn’t going to make nearly as much in Q3 2014 as it did a year earlier. Exclude China from this year’s second quarter, and operating profits actually decreased by 11% year-over-year. I expect net profits to drop by double digits when it reports in October because of the guidance delivered Thursday for its Chinese operations.

Fortunately, for those who own YUM stock, the company’s Chinese stores have proven they can bounce back from adversity.

Yum Brands – Heads or Tails

At the end of the day, I expect the latest problems to be a blip on the radar. No one said doing business in China is easy; David Novak would probably be the first to admit this.

Two years ago, I wrote about “The Dark Side of Yum Brands’ China Strategy.” At the time, I was mostly concerned about the company’s U.S. franchisees; I still am. But as far as its plans for China, I don’t think anything that’s happened in the past two years should or will discourage it from bounding ahead.

Emerging markets are the future for Yum Brands.

The latest fiasco is simply the price of doing business in the wild west. YUM stock eventually will gain traction, but probably not until it has sorted out its supplier issues in China.

This definitely is a stock worth buying on weakness.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.