Provider of bundled local and long-distance telephony Talk America (NASDAQ:TALK) and its shareholders have endured a tough year. In fact, they've had a tough couple of years.

In 2004 alone, an FCC ruling dealt the company a heavy blow when it lost access to the Baby Bells' networks at very attractive prices (fully explained by Rich Smith). In response to this change in fundamentals, Tom Gardner banished the stock from his illustrious Hidden Gems portfolio at a loss (to see why the stock was included in the first place, check out Tom's The Next Telecom Double?).

But then came last night's earnings report, and there was finally something good to smile and, yes, talk about. Billed bundled lines posted a 38% yearly rise to finish the quarter at 683,000, and total revenue also rose 21% to $120.5 million. Net income came in at $9.1 million, or $0.32 per share, handily beating analyst estimates of $0.30. The company also guided upwards for the upcoming fourth quarter, raising the earnings-per-share estimate to the $0.35-$0.42 range, well above the previous $0.30 estimate. And as a cherry on top, Talk America announced that all but $5.5 million of its long-term debt has been retired while its cash reserves were boosted to $29.4 million.

In response, investors sent shares up 17% in after-hours trading.

Today, Talk America appears cheap again at less than six times 2004 earnings. But appearances can be deceiving, and investors should not forget that they are ultimately buying companies for their potential to generate and grow earnings. In this case, 2005 earnings are expected to be significantly lower, so the cheap could very well get a lot cheaper in the near future.

No doubt, it will be a tough year as the company aggressively seeks to switch as many customers as it can, as fast as it can, to its own networks while simultaneously negotiating revised access agreements with the likes of BellSouth (NYSE:BLS) and Verizon (NYSE:VZ). If that weren't enough, the company will continue to face competition in its key Michigan area from SBC Communications (NYSE:SBC).

For risk-averse long-term investors willing to stomach some serious ups and downs, Talk America could offer handsome returns. As evidenced by today's trading activity, good news at companies with very low valuations can produce wild spikes in price and success of the company's upcoming high-speed Internet service offering could prove to be such a catalyst.

Take a free trial to Motley Fool Hidden Gems today. Even with the Talk America loss, Tom's picks have generated a 36% total return since inception, compared with the S&P 500's 6%.

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Fool contributor Marko Djuranovic does not own shares in any companies mentioned in this article.