Are Diageo shares the ultimate recovery play?

It never rains but it pours. That seems to have been the story for brewer and distiller Diageo (LSE: DGE) in recent years. Tough markets in Latin America, increasing numbers of consumers spurning alcohol, supply challenges with Guinness in England: the list goes on. Little wonder that Diageo shares have lost over a quarter of their value in the past year.

Taking a step back though, there are a few things to remember about what increasingly looks like a company in trouble.

This FTSE 100 firm is massively profitable and has a market capitalisation of £49bn.

It has increased its dividend per share annually for decades. It owns many of the world’s leading alcoholic drinks brands, from Johnnie Walker to Smirnoff.

So, while Diageo shares have been poor performers lately, could this be the ideal recovery play for a long-term investor like me?

It’s all about future demand

Diageo may do better or worse at different moments.

But in the long term, I think that if demand for premium alcohol is resilient, it has the right assets to prosper. Those include strong brands, unique production facilities and an excellent global distribution network.

So I reckon the key question when it comes to how good a recovery play Diageo may be is what will happen to the global alcohol market in coming decades.

After all, weak demand and declining interest among younger consumers is not a problem specific to Diageo. US-listed Corona brewer Constellation Brands has fallen 27% in a year. Anheuser-Busch InBev is down 13%. In Europe, Remy Cointreau shares have tumbled 48% over the past 12 months.

Multiple risks face the drinks industry

There are usually good reasons for that sort of rout.

Investors have real concerns about short-term demand for premium tipples and the longer-term question of whether alcohol sales will enter the sort of decline we have seen with cigarettes. They might.

Diageo’s interim results this month provided cold comfort, with both volumes and sales revenues in the first half of its financial year showing slight declines year on year.

With the global economy still looking uncertain and many consumer budgets stretched, I do not expect to see any strong turnaround soon either in business performance or Diageo shares.

Here’s why I’m feeling confident

Longer term though, I am doubtful that the spirits market will show significant, sustained decline. As more people enter the middle class as the global population grows, I expect spirit demand to remain high.

Beer I think may see more obvious volume declines, although in recent years Guinness has been successfully bucking that trend. The first half was the eighth in a row in which the black stuff has delivered double-digit growth.

So while I see no immediate reason for Diageo shares to bounce back in a big way any time soon, as a long-term investor I am feeling pretty good about its recovery prospects.

It may not be the ultimate recovery play: some beaten down far smaller companies have more space for their battered share prices to soar.

But I like Diageo’s size. Unlike many recovery plays, even while it is struggling, it remains massively profitable. I plan to hang on to my Diageo shares.