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Potential HTCO red flag - Q3 '09 tax reversal boosts earnings substantially

|Includes:Enventis Corporation (ENVE)
I've seen HTCO (the Minnesota and Iowa telecoms provider) do well on a number of screens, for example 10.2x P/E and 5.8% yield and the recent mention as a fast growing small business by Forbes. I was going to put a limit order in for them this week, but then as final due diligence I read the details of their 10Q (quarter ended 9/30 '09):

"Net income totaled $6,106,000 in the third quarter of 2009 up substantially from the $2,072,000 reported in the same quarter of last year and up from the $2,117,000 of the second quarter of 2009. A reduction of income taxes accrued, which related to the expiration of a statute of limitations added $4,454,000 to third quarter net income. Without the benefit of this income tax reduction, net income in the third quarter of 2009 would have been $1,652,000, down $420,000 or 20.3% compared to the third quarter of 2008."

Of course this is just one data point, but it's a material one in my view – backing out the reversal of an income tax provision puts HTCO on a 16.2x TTM P/E (not 10.2x) and the resulting underlying earnings are falling rather than rising, of course the yield would be unchanged, so you may still wish to invest for that reason.

The reason I'm concerned about the reversal of this tax provision is that it's unlikely to represent sustainable cash earnings for the business (i.e. they are unlikely to be able to do it again in Q3 2010). Hence, there may be good reasons to buy HTCO, but a low trailing twelve month p/e does not appear to be one of them.


Disclosure: No position in HTCO
Stocks: ENVE