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Greenberg: Warning Bells at MercadoLibre

By: Herb Greenberg | 09/12/13 - 01:33 PM EDT

Each time, the shares have recovered, moving to higher highs. Also, to be fair, Galperin and his wife still own 3.7 million shares through a trust, which ranks them among MercadeoLibre's biggest holders.

But this time the sales are against the backdrop of the plunging currency, relentless inflation and accusations by Off Wall Street that the company's forex accounting leads to artificially propped-up results.

Off Wall Street first started raising red flags over MercadoLibre well over a year ago. Barron's has also raised questions. But it wasn't until a report in May, as Latin American currencies tumbled in the face of hyperinflation, that the research firm started questioning MercadoLibre's forex accounting.

Much of this gets into an arcane corner of accounting, with discussion of such things as parallel markets and the blue-chip swap rate. But, in a nutshell, Roberts believes MercadoLibre's forex translation should be in local currencies (the parallel markets, or blue-chip swap rate, depending on the country), and not what he calls the "fictional" official rate. That official rate, which MercadoLibre uses, is at a considerably higher rate than local currency. Other companies, including Herbalife (HLF) in Venezuela, use the more conservative approach.

While revenue growth has slowed at MercadoLibre, it remains impressive, with climbs of 26% and 22% in the past two quarters. But much of that growth, Roberts says, has been "driven by inflation, which has been very intense. The more inflation, the better the results."

Roberts believes that, if the accounting had been more conservative, results would have been considerably lower. For example, he estimates that, if the company had properly accounted for foreign exchange in Argentina and Venezuela last quarter, MercadoLibre's revenue would've grown by 11.6%, not 26%. And rather than reporting earnings per share of $0.67, it would have been $0.43.

"Investors are paying for illusory sales and profits," Roberts says.

Analysts are also starting to wonder how results would be if the company accounted for its currency differently. In a question on last quarter's earnings call, Deutsche Bank analyst Ross Sandler noted, "There's been a lot of scrutiny publicly in the press around financial reporting, given hyperinflation in the region." He then wondered how the company's results would have been if MercadoLibre had reporting its growth "under the kind of everyday FX rates," or local currencies, as Roberts has suggested.

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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