American Express (AXP) Stock May Be 27% Undervalued As Card Acceptance Expands

American Express has seen its share price climb sharply over the past few years, even as the stock has pulled back in recent months. That rise puts fresh focus on a simple question for investors: Is the current valuation supported by the returns the business earns on its capital?

• Over the past 3 years, American Express has delivered a total return of about 112.2%, which puts real weight on whether the company’s capital returns can justify that kind of share price change.
• Recent moves to expand card acceptance to more than 190 million merchant locations worldwide and deepen business banking offerings can influence how efficiently American Express reinvests capital and how durable those returns may be over time.
• What if you looked at American Express through its earnings instead? See why American Express's 18.3x P/E tells a different valuation story.

The issue now is whether the price investors see on the screen today is reasonable when measured against the returns American Express earns on the capital it puts to work.

If you like analysing how American Express turns invested capital into long term shareholder returns, you might also want to scan for other companies through the 32 high quality undervalued stocks

Is American Express a Bargain on Excess Returns?

The Excess Returns model examines how profit on equity compares with the cost of that equity. For American Express, the framework points to a wide gap between what the business earns on shareholder capital and what investors require as a return. Book value is $50.79 per share and the stable book value estimate is $59.21 per share, while stable EPS is put at $21.54 per share. Against a cost of equity of $4.92 per share, this implies an excess return of $16.62 per share built on an average return on equity of 36.37%.

With the shares trading at $306.33, the Excess Returns projections indicate that American Express' estimated intrinsic value sits meaningfully above the current share price. The recent expansion of card acceptance to more than 190 million merchant locations worldwide helps explain why the model still sees a strong excess return stream rather than a business simply treading water. Readers who want to see the full Excess Returns output and how it compares to the market price today can use. Find out what American Express could be worth using our Excess Returns estimate.

The American Express Narrative: What Would Justify Today's Price?

Narratives for American Express pick up where the valuation puzzle leaves off. They spell out which assumptions on future growth, margins and earnings would need to hold for the stock to justify a meaningfully higher or lower price than today, and they sit on Simply Wall St's Community page. Each one links its number to a clear view on how American Express' growth, profitability and risk profile might evolve, giving you a reference point to revisit as new information comes through.

Community views on American Express are split between those who see more upside in the premium model and those who think the current pricing already bakes in a lot of that story.

Bull case: 18% undervalued

"Sustained momentum in acquiring younger (Millennial and Gen Z) cardholders, with these groups showing strong spend growth and lower delinquency rates compared to industry averages…"

Discover why this Narrative puts American Express at 18% undervalued.

Bear case: roughly fairly valued

"Please remember that the fair value estimate is just a number and, probably, a very wrong number. However, overall, American Express seems to be overvalued…"

Explore why this Narrative puts American Express at roughly fairly valued.

Before you move on, there is one more American Express check to make

Price, profit and capital returns only tell part of the story for American Express, since the real question is who is steering the ship and how their pay pushes decisions. See who runs American Express and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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