• If you are wondering whether American Express shares still offer value at current levels, this article will walk through what the numbers suggest and how that might fit your own expectations.
• The stock last closed at US$307.43, with returns of 5.1% over 1 year, 78.0% over 3 years and 117.3% over 5 years. The shorter term picture shows a 4.3% decline over 7 days, a 12.7% decline over 30 days and a 17.5% decline year to date.
• Recent headlines around American Express have kept attention on the company, giving investors more information to weigh against those mixed short term moves. This news context helps frame the question of whether the current share price reflects what the business may be worth.
• On Simply Wall St's 6 point valuation checklist, American Express currently scores 5 out of 6, which suggests it screens as undervalued on most of those metrics. Next we will look at how different valuation methods approach that question before finishing with a broader way to think about fair value.

Approach 1: American Express Excess Returns Analysis

The Excess Returns model looks at how much value a company can create above the return that shareholders are assumed to require. Instead of focusing on cash flows, it starts with the book value of equity and asks how efficiently that equity can earn profits over time.

For American Express, the model uses a Book Value of $48.80 per share and a Stable EPS of $20.85 per share, based on weighted future Return on Equity estimates from 12 analysts. That implies an Average Return on Equity of 36.24%, compared with a Cost of Equity of $4.76 per share. The difference between what the business is expected to earn and what shareholders require is the Excess Return of $16.09 per share.

The analysis also assumes a Stable Book Value of $57.53 per share, sourced from weighted future Book Value estimates from 9 analysts. Combining these inputs, the Excess Returns model calculates an intrinsic value of about $388.44 per share. Relative to the recent share price of $307.43, this suggests the stock appears around 20.9% undervalued according to this approach.

Result: UNDERVALUED

Our Excess Returns analysis suggests American Express is undervalued by 20.9%. Track this in your watchlist or portfolio, or discover 45 more high quality undervalued stocks.

Approach 2: American Express Price vs Earnings

For a consistently profitable company, the P/E ratio is a useful way to think about what you are paying for each dollar of earnings. It connects directly to what the business is currently earning, which many investors find easier to relate to than cash flow models.

What counts as a “normal” P/E depends on what investors expect for future growth and how much risk they see in those earnings. Higher expected growth or lower perceived risk can justify a higher P/E, while lower growth or higher risk usually points to a lower multiple.

American Express currently trades on a P/E of 19.73x. That sits above the Consumer Finance industry average of 8.65x, but slightly below the peer group average of 21.99x. Simply Wall St’s Fair Ratio for American Express is 19.92x, which is a proprietary estimate of the P/E you might expect given factors such as its earnings profile, industry, profit margins, market value and risk characteristics.

This Fair Ratio can be more informative than a simple peer or industry comparison because it adjusts for the company’s own growth, risk and business quality rather than assuming all companies deserve the same multiple. With the current P/E of 19.73x sitting very close to the Fair Ratio of 19.92x, the shares look priced at roughly the level this framework would indicate.

Result: ABOUT RIGHT

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Upgrade Your Decision Making: Choose your American Express Narrative

Earlier we mentioned that there is an even better way to understand valuation. Narratives let you attach a clear story about American Express to the numbers by linking your view on its revenue, earnings and margins to a financial forecast, a fair value estimate and then a simple comparison of that fair value to the current share price. This is all available within an easy tool on Simply Wall St’s Community page that updates as news or earnings arrive. You can see, for example, how one investor might build a more cautious Narrative around a US$230.00 fair value using assumptions like 9.0% annual revenue growth, a 15.2% profit margin and a 15.1x future P/E. Another investor might build a more optimistic Narrative around a US$462.00 fair value with 10.63% revenue growth, a 16.19% margin and a 26.66x future P/E. You can then decide for yourself which story feels closer to your expectations.

For American Express however we will make it really easy for you with previews of two leading American Express Narratives:

Fair value in this bullish narrative: about US$308.19 per share

Implied discount to that fair value at the recent US$307.43 share price: around 0.2% undervalued

Revenue growth assumption: 10.81%

• Focuses on product refreshes across roughly 40 cards and recent card partnerships as key drivers of card acquisitions and spending.
• Builds in revenue and earnings growth supported by card fee revenue, acquisitions in dining and digital services, and ongoing Membership Model changes.
• Assumes that consistent revenue growth and high spend from new and existing cardmembers support a case for the shares trading close to this higher fair value.

Fair value in this more cautious narrative: about US$284.21 per share

Implied premium to that fair value at the recent US$307.43 share price: around 8.2% overvalued

Revenue growth assumption: 10.40%

• Flags risks around slower travel and entertainment spending, cost pressures from rewards, and potential credit card rate caps that could weigh on margins.
• Builds in lower profit margins and a more moderate future P/E multiple, even though analysts in this camp still expect higher revenues and earnings over time.
• Highlights the gap between a fair value around US$284 and recent prices as a sign that expectations embedded in the share price may be ahead of this scenario.

If you want to see how these bullish and bearish stories stack up against your own expectations for revenue, margins and valuation, you can use the full narrative tools on Simply Wall St to adjust the assumptions yourself and see how that changes the fair value you are comfortable with. Curious how numbers become stories that shape markets? Explore Community Narratives

Do you think there's more to the story for American Express? Head over to our Community to see what others are saying!

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.