FedEx (NYSE:FDX) has been making investors a lot of money this year, crushing earnings and catapulting its stock to new heights. On Oct. 20, the stock reached an all-time high at $293.30 a share, up an astounding 90% for the year before pulling back over the past week. 

Let's analyze why FedEx has been doing so well, if it can continue, and if the stock is worth buying despite its higher price.

A FedEx Express plane cruising above the clouds.

Image source: FedEx Corporation.

Truly exceptional earnings

Debating FedEx's valuation is one thing, but it's almost impossible to ignore how well this company is performing right now. FedEx's first-quarter Fiscal Year 2021 (FY21) results, which represent the quarter ended Aug. 31, were significantly better than the same period last year.

Quarterly highlights included record revenue and its highest net income and operating margin since fourth-quarter FY19. A surge in residential deliveries contributed to FedEx's revenue growth, which the company was able to handle without ramping up spending too much. This led to massive increases in profitability, namely in its Express and Ground segments -- ultimately fueling FedEx's blast to a new 52-week high.

Expectations for FY21

Expectations are high for FedEx for the remainder of the fiscal year. After the company's prior all-time high in early 2018, FedEx stock tanked and severely underperformed the market in 2018 and 2019. Long-term investors who have stuck with the company for years are likely skeptical of the stock's surge and expect the company to continue to post good results going forward.

Like other companies near record highs, FedEx is benefiting from a surge in e-commerce during the pandemic. The company decided not to give guidance for the remainder of FY21, but CFO Alan Graf did say that "based on the current trends in our business, we anticipate increased demand to result in higher revenue and operating income at FedEx Ground and FedEx Express for the remainder of fiscal 2021." 

FedEx's FY21 second quarter will represent the period ending Nov. 30, so it will only capture part of the holiday season. For now, FedEx is saying that "e-commerce is booming at holiday levels." COO Rajesh Subramaniam said that "as we look to Q2, we enter what we expect to be a peak holiday shipping season like no other in our company's history." In sum, shareholders and management have high expectations for the rest of the fiscal year. 

Valuation

Blowout quarters and optimistic expectations typically lead to a high valuation. FedEx surged over 30% in August and has only recently come down in price. Although FedEx's increased stock price may seem to give it a lofty valuation, it's actually in line given how the transportation stock was priced when it was generating similar net income.

FDX Chart

FDX data by YCharts

If FY21 is comparable to the company's record earnings per share in 2018 of $16.79, then the stock would have a price-to-earnings (P/E) ratio of just 10.4 -- given its current price of around $274 per share. Therefore, FedEx is arguably a good value as long as its earnings continue to keep pace with its stock price. 

The verdict

A healthy dose of skepticism is good to have when considering buying a stock near an all-time high. After all, the last thing anyone wants to do is buy something that's overvalued.

In FedEx's case, there is an argument that the company deserves to be priced as high or higher than it is. But even if the company produces record-high net income for FY21, there is concern regarding how sustainable its performance will be in the years following the pandemic. Buying FedEx now means a belief that the company will continue to perform well and that its e-commerce growth is here to stay.

Given that FedEx has a poor track record for consistent performance -- but could very well be in the beginning stages of years of outperformance -- it seems best to apply the principle of buying in thirds. This means determining the ideal amount of FedEx stock you would like to own, and then buying a third now, maybe another third if it produces an exceptional second quarter and has good guidance, and then the final third if its FY21 results really do end up setting records. It's a good method for dipping your toes into a new opportunity without overcommitting too early.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.