Investment group Merrill Lynch has upgraded its recommendation on Diageo to buy from neutral, saying that market expectations are realistic and that the drinks conglomerate will achieve its 7% organic EBIT growth target.

After three years of market downgrades of EPS between 2002 and 2004, Merril Lynch confirmed a 30% increased EPS for Diageo of 52p for 2006, and forecasted 2007 EPS of 59p, implying 14% growth.

Global priority brands, which make up 58% of Diageo's total spirits volumes, and concentrated A&P spending on these premium brands is delivering growth, the research note said. The drinks company is expected to outperform in the expanding US market, where Diageo already has a 22% market share.

Merrill Lynch also set a price objective for Diageo's shares of 1050p each, and said that the drinks company has been "conservative as regards acquisitions".