Whoops! Citigroup's Valuation Flub Leads to a Quick Rating Reversal

  • Shares had gained 4.1% Monday following upgrade from Mello
  • Analyst reversed course 4 days later after discovering error

First, there were Goldman Sachs’s “hunger bonds.” Now, Venezuela’s giving another Wall Street bank fits.

Citigroup cut shares of Latin American e-commerce behemoth MercadoLibre to neutral just four days after calling them a buy. Turns out analyst Paola Mello had overestimated its valuation due to a mixup about the outlook for long-term revenue growth in Venezuela.

One sympathizes with Mello. It’s incredibly difficult to make forecasts related to Venezuela with any degree of certitude at the moment, given that annual inflation is estimated at 600 percent, businesses must cope with myriad official and unofficial exchange rates, and the country has been wracked with deadly anti-government protests amid food shortages.

“We identified a formula error,” Mello wrote in a note to clients Friday. “After a careful review of the model, we now cut our target price by 15 percent to $280 per share, in line with current market prices.”

The stock jumped 4.1 percent Monday on the heels of Mello’s upgrade, but the reversal isn’t sparking a selloff. Shares were little changed at $276.61 as of 11:37 a.m. in New York.

Amazon’s aggressive expansion plans for Brazil also pose a challenge for this Latin American version of eBay, she warned, as its previous entry into Mexico ended up leading to margin compression in a bid to maintain market share.

Mello is far from the first analyst to make a misstep of this nature and quickly reverse course. Just last week, Barclays upgraded and downgraded shares of SemGroup on the same day.

And in late May, JPMorgan Chase exacerbated a selloff in bonds from Brazilian meatpacker JBS by raising the possibility it would add as much as $6.5 billion of debt in the U.S. The next day, JPMorgan sent out a corrected note. The first one had included a misreading of terms governing the company’s obligations, and the second report cut back the new-debt projection to $1.1 billion. Bonds that had tanked recovered some of their losses.

— With assistance by Joshua Fineman

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