Mitch Lawler
4 min read
American Express has delivered strong gains over the past three years, so the real question now is whether the current share price is supported by the returns the business earns on its capital.
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Over the past 3 years the stock has risen 104.0%, which puts real weight on whether those past returns on capital can justify where the valuation sits today.
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New partnerships, including recent work with OpenAI on ChatGPT Wallet and a co-branded Fanatics card, may support expectations for how efficiently American Express can deploy capital into rewards, payments technology and new spending channels.
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If you’d rather focus on earnings, this one’s for you. See why American Express’s 17.8x P/E tells a different valuation story.
The issue now is whether the returns American Express earns on the capital it invests are strong and durable enough to make today’s price look sensible.
If you want to stress test this same question about the returns companies earn on their capital across more ideas, take a look at 32 high quality undervalued stocks.
Does American Express Look Undervalued on Excess Returns?
The Excess Returns model looks at how effectively American Express turns each dollar of shareholder equity into profit above its own funding cost. On this view, the market price of $320.60 is being weighed against the durability of those surplus profits.
American Express is modeled to earn Stable EPS of $21.49 per share on a Stable Book Value of $59.42 per share, supported by an average Return on Equity of 36.16%. With a Cost of Equity of $4.92 per share and an Excess Return of $16.57 per share, the framework assumes the business continues to generate earnings that are comfortably above what investors require for the risk they take. The Excess Returns projections put American Express’ estimated intrinsic value meaningfully above the current share price. Because the new ChatGPT Wallet partnership adds a fresh use case for cards and rewards, the market may not yet be fully reflecting what those excess profits are worth over time. Find out what American Express could be worth using our Excess Returns estimate.
The American Express Narrative: What Would Justify Today’s Price?
American Express’ valuation puzzle only really comes into focus once you spell out the stories about its future that could justify a much higher or lower share price. Narratives on Simply Wall St’s Community page do exactly that by tying a specific set of expectations on growth, margins and earnings to a single outcome for fair value, so you can track which mix of catalysts and risks seems to be playing out over time.
