Goldman Sachs raised its price targets on several European auto makers, saying the sector can continue to outperform, helped by potential positive 2010 earnings surprises that could come from an increase in sector consolidation.

The industry is emerging from the current crisis in a substantially weaker financial position, analyst Stefan Burgstaller said in a note dated Sept. 11 to clients.

The analyst believes the industry is likely to enter a new phase of consolidation with original equipment manufacturers (OEMs) striving to achieve critical relevant scale.

We believe the relative performance of the European automotive sector since March is the result of two drivers, Burgstaller said.

With volume declines stabilizing, car companies were able to arrest the cash burn. Furthermore, car companies benefited from government incentive schemes, which led to better capacity utilization in the second quarter and improved working capital levels, he added.

Burgstaller reinstated Fiat (FIA.MI) as buy, and raised French car parts maker Valeo (VLOF.PA) to neutral from sell. He also upgraded Autoliv (ALIVsdb.ST), world no. 1 air bag and seat belt maker, to buy from neutral.

The DJ Stoxx European Autos Index .SXAP was down 1.85 percent at 228.59 by 0900 GMT on Monday.

(Reporting by Sakshi A Mattoo in Bangalore; Editing by Jarshad Kakkrakandy)