Lumber Liquidators Has 50 Percent Chance of Bankruptcy: Tilson

Lumber Liquidators

The stock price of Lumber Liquidators Holdings (NYSE: LL) plummeted 15% to $11.76 per share today after hedge fund manager Whitney Tilson disclosed that he shorted the stock again.

Lumber Liquidators

Tilson first shorted the company’s stock in late 2013. He decided to cover that position in December last year when he received information that led him to believe that the senior management of Lumber Liquidators was not aware that it was selling Chinese-made laminate with a high level of formaldehyde.

During the Harbor Investment Conference, Tilson said Lumber Liquidators has at least 50% chance of bankruptcy despite having $6.7 million of net cash and $67.2 million available on its line of credit by the end of the fourth quarter.

Reasons that led Tilson to short Lumber Liquidators again

In his presentation, Tilson claimed that the odds have “risen materially” for the stock price of Lumber Liquidators to go down based on new information.

He noted that the widespread coverage regarding the mistake of the Centers for Disease Control and Prevention (CDC) in estimating the risk or cancer posed by the Chinese-made laminate flooring sold by Lumber Liquidators.

According to Tilson, the cancer risk is likely greater even if the CDC revised its estimate, which could increase the company’s liabilities and create damaging publicity.

He also expected Lumber Liquidators to lose a Prop 65 trial, which could result in further negative publicity. The company will likely face even larger legal and regulatory liabilities.

In a Tuesday presentation at the Harbor Investment Conference entitled “Why I’m Again Short Lumber Liquidators In a Word: Cancer,” Tilson claimed he had “new information” leading him to believe that the chances of the stock going down have “risen materially.”

Tilson estimated that the Lumber Liquidators’ operating and cash burn will remain severely negative in the future, and it will experience difficulty in settling regulatory problems, class action, securities fraud and Prop 65 litigation.

He also estimated that more than one million Americans may have been exposed to formaldehyde from Lumber Liquidators’ Chinese-made flooring between 2010 to May 7, 2015. He noted that all of the company’s liability insurers denied coverage for formaldehyde claims under the pollution exclusion in the insurance policies. Lumber Liquidators will be compelled to pay huge legal fees out of pocket.

Lumber Liquidators went off a cliff

In an interview with CNBC, Tilson said, “I now believe that the business has gone from worse to truly horrific. “ According to a business associated with the word formaldehyde is” bad,” but when it is associated with the word cancer, that’s “devastating.”

The hedge fund manager added that Lumber Liquidators “has gone off a cliff” in recent weeks based on information from his “most reliable source.”

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