Investor Optimism Abounds American Express Company (NYSE:AXP) But Growth Is Lacking

It's not a stretch to say that American Express Company's (NYSE:AXP) price-to-earnings (or "P/E") ratio of 16.7x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for American Express as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for American Express

Want the full picture on analyst estimates for the company? Then our free report on American Express will help you uncover what's on the horizon.

How Is American Express' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like American Express' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.0% last year. The latest three year period has also seen an excellent 166% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.2% each year over the next three years. With the market predicted to deliver 13% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that American Express is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From American Express' P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of American Express' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for American Express with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.