Lumber Liquidators, Formaldehyde And Asbestos by Whitney Tilson, Seeking Alpha

Summary

  • Some are claiming that Lumber Liquidators’ Chinese-made laminate “just doesn’t emit harmful levels (of formaldehyde) in the home” and thus “there won’t be any sick people.”
  • But the evidence – both from tests and anecdotally – contradicts this assertion.
  • It is highly likely, I believe, that Lumber Liquidators’ Chinese-made laminate has been (and still is) emitting harmful levels in many customers’ homes and is causing serious adverse health effects.
  • Exposure to formaldehyde, however, is not as serious as exposure to asbestos.
  • But unlike most companies associated with asbestos, who had no idea that it was dangerous, I think it’s highly likely that the senior managers of Lumber Liquidators knew that they were buying toxic, formaldehyde-drenched, non-CARB compliant laminate from their Chinese suppliers, knowingly putting untold numbers of American families at risk.

I recently received an email from a friend in the flooring industry who “hates” Lumber Liquidators, but disagrees with my view that the stock is a compelling short today. I think he makes some good points, which echo what I’ve heard from other bulls on the stock, so in the spirit of stimulating a healthy debate, I’m sharing his email (with permission) and my reply. He wrote:

On the liability side there won’t be any sick people. This stuff just doesn’t emit harmful levels in the home. If 60 Minutes had aired “little Johnny” with no hair, a respirator and a missing limb, Lumber Liquidators would be out of business before Memorial Day; but that scenario won’t occur. Ergo, there aren’t any real damages.

So, if the regulators won’t force Lumber Liquidators to shut down (I think we are both in agreement about this) and the liability on the civil side is reasonably limited because nobody has really been harmed, then why are you short the stock? Yes, you may be right about a $15-20 valuation on $1.25-1.50 of earnings per share this year, but once some of the legal risk is quantified, don’t you think there’s likely to be multiple expansion?

The average Lumber Liquidators customer isn’t very bright because a quick Google search reveals endless terrible reviews and complaints. So this company is accustomed to navigating a jungle of negative headwinds every single day. Eventually people will forget this and these guys will survive.

Listen, I hate these guys… (but) the risk/reward seems to be on the side of reward…

I replied:

If you are right that Lumber Liquidators’ Chinese-made laminate “just doesn’t emit harmful levels (of formaldehyde) in the home” and thus “there won’t be any sick people,” then I might agree that Lumber Liquidators’ stock is not a good short. But, I don’t think you are.

Adverse Health Effects Associated With Formaldehyde Exposure

Let’s start with a general overview of the adverse health effects associated with exposure to high levels of formaldehyde. Here’s what I wrote in my article, A Response to Lumber Liquidators:

For starters, read what the National Cancer Institute and the Centers for Disease Control and Prevention have to say about formaldehyde: it can cause “watery eyes; burning sensations in the eyes, nose, and throat; coughing; wheezing; nausea; and skin irritation,” “upper respiratory tract irritation (that) can potentially exacerbate asthma symptoms and other respiratory illnesses,” “chronic runny nose, chronic bronchitis, and obstructive lung disease,” and is a “known human carcinogen” associated with “several cancers, including nasopharyngeal cancer and leukemia.”

This chart, in a report by the Consumer Product Safety Commission, summarizes it nicely:

Lumber Liquidators

To be clear however: my friend isn’t disputing the adverse health effects associated with exposure to high levels of formaldehyde (nor, I suspect, the results of the deconstructive tests that I, 60 Minutes and others have commissioned). Rather, he’s saying “This stuff (Lumber Liquidators’ Chinese-made laminate) just doesn’t emit harmful levels in the home.”

Does Lumber Liquidators’ Chinese-Made Laminate Emit Harmful Levels of Formaldehyde in the Home?

His assertion, however, isn’t supported by the only evidence we have: the three emissions tests 60 Minutes commissioned, evaluating the formaldehyde level in a typical home with Lumber Liquidators’ Chinese-made laminate flooring, which revealed formaldehyde levels of 57, 93 and 268 ppb – all of which are “massively higher than the limits regulators have set to protect everyone, including children,” as I documented in my article, Answering Questions About Lumber Liquidators.

When 60 Minutes showed the results of these tests to Dr. Philip Landrigan, one of the world’s leading experts on exposure to toxic chemicals, here’s what he said:

I would say long-term exposure at that level would be risky because it would increase the risk for chronic respiratory irritation, change in a person’s lung function, increased risk of asthma. It’s not going to produce symptoms in everyone but children will be the people most likely to show symptoms at that sort of level.

Moving from the theoretical to the actual, while this is anecdotal, here are some of the awful symptoms that have been reported on a single web site by Lumber Liquidators’ customers (as I first reported in my article, Lumber Liquidators is Evil):

  • …our dogs have developed allergies and my youngest daughter who will be 4 in August has been running a fever like an off and on switch every few weeks… she runs a high fever for a couple of days then she’s OK until the next episode. I’m not sure if this has to do with the flooring. I’m almost speechless on one hand. I want to rip the floor out on the other hand we don’t have the money to put flooring back in… So at this point I’m not sure what to do.
  • I had head and chest congestion the whole time we were installing the floor. My friends teased me that maybe I was allergic to the floor. I was at the doctors so many times that he sent me to an allergist. Severe symptoms subsided when we finished putting down the floor. But I still use an inhaler when I exercise.
  • My symptoms are burning eyes and nose and coughing up phlem at night. Also have itchy skin. My two dogs also cough. I thought they had kennel cough, but now think it is the flooring… Open your windows and air the place out frequently, especially before bed. Then pray this gets settled soon as I read that the off gassing can last 10 years.
  • I was doing some reading of scientific papers on this formaldehyde effects, wondering two things. 1. Could my tremors that I have had for the past few months be related to this? Sadly, yes. It also causes neurological damage. 2. How long does outgasing go on with a product like laminate flooring. Bad news again. It was estimated to be in the 10-year range.
  • …we have had boughts of sore throats, burning eyes and my son and I always have stuffy, runny noses.
  • …the itching was so severe I literally had scratches all over my body – it was insane…
  • …my husband…has had MAJOR skin issues…
  • …our children and dogs and I have had multiple issues…
  • My husband has had major skin issues since installation (he installed it).
  • We both have runny noses and burning eyes.
  • Has anyone else had a 24/7
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