SunTrust Puts On Lodging Pair Trade: Upgrades Starwood, Downgrades Marriott

In a report published Monday, SunTrust analyst Charles Scholes upgraded the rating on Starwood Hotels (NYSE: HOT) to Buy while at the same time downgrading shares of Marriott (NYSE: MAR) to Neutral. The analyst boosted his target on Starwood modestly from $81 to $82 and maintained a $59 target on Marriott shares.

Scholes noted "Over the past year, MAR has outperformed HOT, up 60% vs. 35% and has outperformed HOT by 21% YTD... We now see HOT's risk-reward as attractive given its relative valuation to peers and underperformance over the past several months."

Speaking on investor's attitude surrounding Starwood, Scholes noted sentiment is "…about as low as we can recall at any time since 2009; And we see this as a buying opportunity. Investors have been punishing the stock for its lack of share repurchases and overly conservative balance sheet”.

“Going forward, while we are not expecting share repurchases to magically happen...we see the core earnings growth combined with the basic free cash flow story working as we forecast the company will generate over $500M of free cash flow in 2015, or $3/share," according to Scholes.

The SunTrust analyst believes Marriott "has been well rewarded for its more aggressive capital allocation story and we now see much of the anticipation of share repurchases mostly priced into the stock." Scholes sees management as probably having difficulty replicating 2014 repurchase levels, saying "2014 will be mostly fueled by one-time asset sales."

Shares of Starwood Hotels are currently trading down about 1.5 percent to $73.88; Marriott shares are down more than 2.3 percent to $55.91.