Aerospace and Defense are often lumped into one group when it comes to sectors and analysis. Unfortunately, this may be as simple reasoning because of how few large players there are in each. Sterne Agee has issued its top aerospace and defense stocks, looking for stability in defense and continued momentum in aerospace.

The firm’s Peter Arment and Josh Sullivan are covering the sectors. Aerospace could see double-digits earnings growth for pure-play companies. The firm believes that the defense sector will see stability after the recent budget deal keeps spending intact for 2014, supporting current valuations.

Here are Sterne Agee’s current top aerospace and defense stock picks for 2014.

Precision Castparts Corp. (NYSE: PCP) is listed as the firm’s top aerospace pick in 2014. The report says, “We believe the PCP stock is poised for 25%+ appreciation in 2014 reflecting ramping OEM build rates, impact of the Timet synergies, coupled with niche M&A to further boost EPS growth by over 21% CAGR through CY15.”

Boeing Co. (NYSE: BA) is important because Sterne Agee is one of the most bullish firms on Wall Street regarding its upside. Sterne Agee is forecasting free cash flow to top $7 billion before the pre-pension payment in 2014, which will support its new stock buyback program of $10 billion over the next 2 to 3 years. The firm said, “We expect BA’s current valuation to be maintained in 2014 with potential for expansion given the scarcity value of mega-cap industrial with long-term visibility coupled with an active buyback.”

Carpenter Technology Corp. (NYSE: CRS) is one that remains well positioned within Aerospace materials sector, despite industry inventory adjustments still lingering. The firm believes that the value of the Athens facility is underappreciated and is likely to open sooner than the official April date. Sterne Agee also believes that 2014 will be the beginning of a multi-year growth cycle with a significant opportunity to improve cash generation. It even sees 20%+ upside to current levels as 2014 will be a transformational year.

General Dynamics Corp. (NYSE: GD) remains Sterne Agee’s top pick among Defense stocks for 2014. The firm said, “A near doubling in deliveries for the G650 in 2014 and more stable defense funding environment should enable to return to bottom-line growth in 2014. GD should become more aggressive with its capital deployment too given its under-leveraged balance sheet.”

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