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The credit rating of AutoZone, Inc.’s (AZO - Analyst Report) senior unsecured debt has been raised one notch to "Baa1" from "Baa2" by Moody's Investors Service of Moody's Corporation (MCO - Analyst Report). Additionally, the rating agency affirmed the ratings on the Prime-2 commercial paper. The outlook for both the ratings is stable.

Moody’s started the review of AutoZone’s ratings for upgrade on Dec 16, 2013. The upgrade of the rating is a result of that review. The “Baa1” rating is three grades above speculative-grade or junk status.

The credit ratings are based on the strong business prospects of AutoZone due to rising age of vehicles and increase in miles driven. The company has the best margins among its peer group and management maintains the debt-to-EBITDA ratio at the targeted level. Moreover, Moody’s expects AutoZone to supervise store spending to keep the stores at par with its peers.

The stable outlook was based on Moody’s’ belief that AutoZone will be able to maintain its strong credit profile and manage its share buybacks to maintain the current level of liquidity.

Moody’s might upgrade AutoZone’s ratings if the company maintains its EBITA/interest ratio at 8 times and debt/EBITDA ratio at 2.25 times while ensuring strong liquidity. On the other hand, if EBITA/Interest ratio sinks below 6 times, debt/EBITDA ratio falls below 3 times or liquidity position of AutoZone weakens, then a rating downgrade is possible.

AutoZone currently carries a Zacks Rank #3 (Hold). Some better-ranked auto parts companies include U.S. Auto Parts Network, Inc. (PRTS - Snapshot Report) and Advance Auto Parts Inc. (AAP - Analyst Report). While PRTS carries a Zacks Rank #1 (Strong Buy), AAP holds a Zacks Rank #2 (Buy).

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