American Express Shares May Be 23% Undervalued, Excess Returns Suggest

American Express (AXP) has delivered impressive returns over the past five years, but its current valuation suggests that it may be trading at a discount. According to Excess Returns' intrinsic value estimate, AXP shares are approximately 23% undervalued. This estimate is based on the company's excess return of $16.56 per share, which feeds into an intrinsic value estimate of about $416 per share.

The stock's price implies a 22.7% discount to this Excess Returns estimate, indicating that AXP may be undervalued relative to its earnings power. However, the P/E ratio suggests that the shares are trading at roughly fair value compared to peers in the Consumer Finance industry. The company's average return on equity (ROE) stands at 36.46%, which is a key factor in determining its valuation.

The Excess Returns model examines how much profit AXP can generate above its required cost of equity and then capitalizes that stream. This approach highlights the durability of excess profitability, which is essential for investors to consider when evaluating the company's value. However, the market view reflects what investors are currently willing to pay for that earnings profile.

The crux for investors is whether American Express can maintain its franchise strength and returns on equity while avoiding a material slip in card spending or credit quality. This will be crucial in determining the stock's valuation and potential upside relative to its intrinsic value estimate.