Time to Sell Berkshire Hathaway and Buffett?

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Berkshire Hathaway Inc. (NYSE: BRK-A) reported its third-quarter earnings over the weekend. The report looks good on the surface, but many treated it as a cautionary tale in their weekend reporting. We have said over and over that Warren Buffett has always maintained that investors need to steer clear of any single quarterly earnings report in favor of book value growth. The problem with the earnings report is that Berkshire Hathaway’s book value growth is in a total disconnect with the growth of the stock price.

The reason that Buffett says to avoid spending too much time evaluating quarterly earnings is that there are many moving parts in Berkshire Hathaway. There are also so many securities and operational gains and losses in any quarter that they can severely throw off comparisons of prior reports.

Team Buffett reported that third-quarter operating earnings grew to $3.662 billion from $3.399 billion. That is a gain of 7.7%. Net earnings after items included securities sales and rose by a sharp 28.9% to $5.053 billion. Again, that shows how volatile the numbers can be.

Operating earnings per share rose by 8.3% from a year ago to $2,228 per class A share. The net earnings per share including gains rose by 29.5% to $3,074 per class A share. Buffett has purchased some shares under the Berkshire Hathaway Inc. (NYSE: BRK-B) buyback plan. This earnings report showed that the average class A shares outstanding were 1,643,779 at the end of the third quarter, versus 1,652,184 a year ago.

Insurance underwriting was a point of weakness as well. Earnings from operations there were down to $170 million from $392 million a year ago. Insurance investment income rose to $861 million from $733 million a year ago. The non-insurance businesses accounted for $2.783 billion of the total earnings, up from $2.474 billion a year ago. That is at least in part from railroad gains.

If you go back to the book value, that is doing well in 2013 without comparing it to anything. Berkshire Hathaway’s shareholder equity has increased $20.7 billion and the class A book value per share rose by 11.0% to $126,766 as of September 30, 2013. Where the problems arise is the closing price of $173,122.50 for its class A shares. That is up by just over 29%, versus the $134,060 closing price in 2012. The September 30 closing price of $170,410 was up 27.1% from the end of 2012.

The major disconnect is that Wall Street investors have become much more willing to pay up for Buffett’s empire. The book value per share that Buffett tells you to watch rather than any earnings report rose by 11%. The stock price is up almost 30%. How can that not be a serious disconnect?