• by David Goetzl  @dgoetzl, January 17, 2008

A day after Discovery announced an extraordinary deal with renaissance entertainer Oprah Winfrey to launch her own network, a Wall Street analyst issued a report characterizing it as further evidence that Discovery is a "must-own" stock.

The principal reason cited by Pali Research's Richard Greenfield is the aggressive transformation of multiple networks made by CEO David Zaslav, who has been on the job for just over a year. The former NBC Universal executive has taken modestly watched--though well-distributed--networks and capitalized on their reach by establishing them in a new more profitable niche. Discovery Health, for example, becomes Oprah's network.

"Discovery's founder John Hendricks and prior CEO Judith McHale were successful in capturing cable network shelf space across multichannel operators (launching channels and maximizing subscribers per network), however, they were far less successful in building a broad portfolio of well-branded/programmed and profitable channels," Greenfield wrote in Wednesday's report.

The analyst noted that with 80% of cash flow for Discovery Communications coming from flagship Discovery network and TLC, the company has considerable profit upside through the other networks in its portfolio.

Greenfield wrote that "success from even a couple" of the re-positioned networks looks to create "meaningful incremental value over the next few years that we do not believe is reflected in the current share price." Discovery is a "must-own media stock, with superior growth potential over the next several years."

For now, Greenfield is referring to Discovery Holding Co., led by John Malone, which controls two-thirds of Discovery Communications. But later this year, plans are in place for Discovery to become a fully public company. Discovery Holding Co. opened Wednesday at over $24 a share, up from some $15 last spring.

The widespread channel surgery under Zaslav includes Discovery Home becoming Planet Green--a move this year that hopes to profit from consumer interest in an environmentally friendly lifestyle, and advertisers' desire to bolster their image as good corporate citizens. Zaslav put the plan in motion last spring, within months of taking the job.

More recently, Discovery Times has become Investigation Discovery, focusing on crime and forensic programming--which was formerly a programming genre on the Discovery channel. Animal Planet and Science Channel are also in the midst of changes, but won't alter their names.

Then came the Winfrey coup--where Discovery Health will become OWN, The Oprah Winfrey Network, next year. The move is a 50-50 joint venture between Discovery and Winfrey--and Oprah.com becomes part of it.

Greenfield wrote that "we believe half of OWN will be worth significantly more than 100% of Discovery Health, particularly when one considers that Discovery Health's Web site had no clear message/purpose; whereas Oprah.com is already a very profitable Web site with marquee advertisers."

Greenfield also indicated that Zaslav hasn't stopped transforming networks, perhaps evaluating Discovery Kids, the Military Channel and FitTV as potential targets. Also, an altered image for profitable cornerstone TLC could be beneficial, according to the analyst.

"Its niche is female-skewing reality programming, but that does not come across from ... the name TLC," Greenfield wrote.