American Express (AXP) Stock May Merit A Look Following AML Fine

American Express has produced a 3 year share price run that puts its capital allocation choices under a bright spotlight, and the question now is whether the returns it earns on its capital are strong enough to justify where the stock trades today.

• Over the past 3 years the stock has returned 133.2%, which raises the issue of whether that performance is backed by the underlying returns American Express generates on the capital it deploys.
• The recent US$350 million regulatory penalty tied to anti money laundering failures may affect how much cash American Express can allocate to growth projects or shareholder returns, which feeds directly into any assessment of the value created on its equity base.
• Prefer to judge American Express on earnings? See why American Express's 19.3x P/E tells a different valuation story.

The stock's next move may depend on whether the returns American Express earns on its capital are high and durable enough to support the price implied by that 3 year gain.

If you want a broader watchlist of companies where the focus is also on what they earn on each dollar invested, a screener built around 33 high quality undervalued stocks is a useful place to start.

Is American Express Still Cheap on Excess Returns?

The Excess Returns model looks at how much profit American Express generates above the return investors require on its equity base. For American Express, the inputs signal a business earning substantially more on its capital than that equity cost. Stable EPS is set at $21.80 per share against a Cost of Equity of $5.00 per share, which produces an Excess Return of $16.80 per share. An Average Return on Equity of 36.54% built on a Book Value of $50.79 per share, rising to a Stable Book Value estimate of $59.67 per share, points to consistent profitability on each dollar retained in the business.

The Excess Returns projections put American Express' estimated intrinsic value meaningfully above the current share price of $323.61. This means the model views the market as asking a lower price than its implied stream of excess earnings. Despite the recent US$350 million anti money laundering penalty and the required compliance overhaul, the model still sees value in the gap between high expected returns on equity and what the market currently pays per share. 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 by spelling out which paths for future growth, profitability and earnings would need to unfold for the stock to be worth materially more or less than today’s price. Each scenario ties a fair value to a particular storyline about American Express' potential catalysts and key risks so you can track over time which version of events is actually taking shape on Simply Wall St's Community page.

Community views on American Express are split between premium fee momentum and questions about how much of that story is already priced in.

Bull case: 12% undervalued

"Ongoing focus on premium cardmembers and refreshed products, now supported by 32 consecutive quarters of double digit net card fee growth and expected high teens fee growth by the end of 2026, continues to point to further expansion in fee revenue and support for net margins…"

Discover why this Narrative puts American Express at 12% undervalued.

Bear case: 8% overvalued

"Please remember that the fair value estimate is just a number and, probably, a very wrong number…"

Explore why this Narrative puts American Express at 8% overvalued.

An open question American Express investors cannot ignore

American Express has one more thread that deserves your attention, with recent transactions by people inside the business flagged by our checks and the specific sellers, sizes and possible meaning left for you to review in detail. See the recent insider selling flagged for American Express.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com