The European car market bottomed out last year, ending years of dismal sales following the euro zone financial crisis. In September, sales across Europe were up 6.1 percent in September on the same time last year, according to the Association of European Carmakers (ACEA)
French car maker Renault and Germany's Volkswagen both posted a strong set of results on Thursday, with turnaround in European sales adding to profits for both firms.
"Are autos still cheap vs. most other sectors? We think the positive thesis on the sector is unchanged," equity analysts at Citi led by Philip Watkins said in a recent note, who has been bullish on the sector for some time.
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"VW benefits from an attractive model cycle ahead as Audi refreshes most of its range. We also see Renault offering significant value," he said.
Shares in Europe's largest automotive group by sales, Volkswagen, were up around 4 percent in early trade on Thursday before paring gains to trade 0.5 percent higher as the DAX fell over 1.5 percent.
The firm said solid demand from Europe and China for its luxury Audi and Porsche models bolstered profits.
Meanwhile, Renault posted a near 7 percent improvement in its third quarter revenues and upgraded its European auto market growth forecast. The group traded as much as 5 percent higher after the news.
Analysts at Morgan Stanley said Renault shares have sold off sharply this year and will likely remain somewhat oversold, but the "big European recovery story" is behind the sector.
"People, just didn't buy new cars because things have been so difficult, but people are starting to buy new cars again," said founder & CEO of Destination Wealth Management, Michael Yoshikami.
"I think the revival started last year and some people are looking to dabble in automotive stocks because maybe that replacement cycle is starting to happen – but it's still pretty low margin tough business," he added.
September's new passenger-car registrations in the European Union and the countries of the European Free Trade Area totalled 1.269 million vehicles, up from 1.196 million a year ago, ACEA said.
In spite of signs that the European car industry might have recovered from the euro zone crisis, there are still headwinds out there for the industry to cope with. The German economy suffered a shock contraction in the second quarter of this year and manufacturing slowed more sharply than first estimated in September.
Meanwhile, France has been labelled the "sick man of Europe" as unemployment remains sky high and the country has consistently failed to meet EU budget deficit reduction targets.
But ACEA data showed car sales in both countries rebounded in September after contracting a month earlier. Sales in Germany, the region's biggest market, gained 5.2 percent to 260,062 models, third-placed France was up 6.3 percent.
"In the Japanese industrial production data yesterday – the auto sector was surprisingly positive – they are not selling those things in Japan, the Japanese aren't buying cars. It does look like there is some revival in demand on a global level ," global economist at UBS Investment Bank Paul Donovan told CNBC.
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