With the increasing ubiquity of broadband Internet connections, many ask, is anyone still using dial-up service?  According to Portfolio Manager Ryan Jacob of Jacob Internet Fund, the answer is yes.  He says one dial-up Internet service provider, Earthlink (ELNK), presents a great value investment right now.

Earthlink is trading at two times its expected cash flow, which is an unusual find, Jacob says.  “This, plus their existing cash, would give them enough to buy about half of the shares outstanding by the end of the year.”

What’s interesting, says Jacob, is that cash flows are very stable, even though they are declining.  But, he notes, “We think they’ll have a longer tail to their business than people expect.”

Though some don’t see right away why anyone still has dial-up, the business is still generating a lot of cash, he says.

A lot of Earthlink’s business is dial-up, though the company does broadband, too, through partnerships with cable companies like Time Warner Cable (TWC).  In these partnerships, says the fund manager, Earthlink provides the service and customer support to the broadband providers, though the cable company provides the connection.

Most of Earthlink’s customers, he says, are value-oriented and don’t want to pay more than, say $10 a month.

Earthlink can also benefit from difficult economic times in a few ways, Jacob adds.  Some people may be experiencing tough times and may be holding off on moving on to broadband in their households.  Others might choose to save some money and drop back from broadband to dial-up.

Some other reasons Earthlink’s dial-up service continues to make money is that some people have second houses where they don’t want to pay for full broadband service when they’re there only a few months a year.  Many people also keep dialup as a backup in case their broadband service is interrupted.  Finally, some people simply want to keep their Earthlink email address, so they’ll continue paying the monthly fee even if they get a broadband connection.

Jacob says the company’s management is very conservative and shareholder-friendly, which is why his fund has a large position in the company. 

Earthlink makes up about 6% of the fund, and is in the top five of its holdings.

He says the service provider is likely to do a large share repurchase or give out a dividend by the end of the year.

He also mentioned the possibility of getting involved with AOL.  More specifically, Earthlink may be interested in nabbing AOL’s remaining dial-up service.

Time Warner (TWX) has recently announced it is spinning off AOL.

Jacob Internet Fund (JAMFX), an Internet technology-focused fund, was started in 1999 and has $34 million in assets under management.  Jacob says the fund is set apart from others because it is split between value and growth, while most technology-focused funds stick with growth stocks.