Why Are These Companies Free?

“Can the stock market go to zero?” someone asked me the other day. No, I told her, because the assets and earning power of companies will always be worth something, and because as some companies fail, others become stronger, and because if prices keep plunging, dividend yields will eventually grow too fat to ignore.

Then I walked away quietly second-guessing myself, and just for a moment slipped into a financially nihilistic day dream about stocking an Adirondack cabin with canned beans and drinking water.

Some well-known companies have gone to zero, though, and not just ones that are in or teetering near bankruptcy. Companies like Eastman Kodak (EK), Humana (HUM) and RealNetworks (RNWK) have negative enterprise values. That’s the cost to buy all of their shares and pay off their debt while applying their available cash to the transactions. Seemingly, a buyer who can afford all of the shares can end up being paid to own these companies.

Of course, these companies aren’t truly free, or even necessarily cheap. Let’s look at possible explanations of the price for each.

In Eastman Kodak’s case, its net cash stockpile of more than $1 billion dwarfs its stock market value of just over $600 million, but investors are likely eyeing the rate at which the company is burning cash. Eastman was unprofitable when it entered this recession. Management thinks sales will drop 12% to 18% this year. The company is laying off thousands of workers, but in the short term, layoffs cost money. Standard & Poor’s recently lowered Eastman’s debt rating to six notches below investment grade, citing its cash consumption.

Humana has a whopping $6.6 billion in cash and short-term investments, compared with a stock market value of just $3.5 billion. But those numbers mislead because of how health insurers account for money likely to be paid to their insured in coming quarters. Humana lists accounts payable of $4.7 billion, which for purposes of figuring out the company’s takeover price, ought to be added in. The result is a low but positive enterprise value — perhaps warranted, considering all the talk in Washington about making health care more affordable at the expense of health plan profits.

RealNetworks is debt-free, holds cash and short-term investments of around $370 million and is valued by the stock market at $274 million. Barbara Coffey, who covers the stock for Kaufman Brothers, an investment bank, says the negative enterprise value is perhaps owed to the perception that the company is quickly burning cash, since earnings from a joint venture with Viacom don’t show on RealNetworks’ financial statements as operating cash flow. That aside, the company still competes with Apple (AAPL) for digital music sales. That seemed a difficult enough business even before consumers stopped spending.