BFI-4During the quarter, we initiated a position in BrainJuicer Group PLC, based in the United Kingdom. We’ve admired the company and its founder, John Kearon, for a couple of years, but hadn’t been comfortable enough with the price to purchase any shares. That changed during the first quarter. A combination of slower growth in Europe and in non-core product lines, volatile markets early in the quarter, and a sell recommendation from a newsletter of The Motley Fool (even though a Motley Fool mutual fund still owns a decent number of shares) created an opportunity for us to buy shares in what we believe is a great business with the potential to be much larger over the years, at an attractive price. We acquired a little more than 4% of the company, mostly in 2 block trades (at £2.75 and £2.85 per share), and it was our second-largest position at the end of the first quarter.

BrainJuicer is a global online market research company. The company’s customers use BrainJuicer and its products to do things such as test ads, concepts, and product packaging; and track brand value before making more significant investments in those areas. The company’s goal is to transform the way market research has traditionally been done by incorporating behavioral economics into market research. The company uses psychologist Daniel Kahneman’s description of the emotional part of the brain (“System 1”) and the more logical, rational part of the brain (“System 2”) to describe the psychology behind consumer buying habits and behavior. It believes System 1 is a better predictor of behavior and reaction to brands and marketing. Most market research, on the other hand, has historically been aimed at using System 2 analysis, which BrainJuicer considers to be much less effective.

For a small company, BrainJuicer has built a great reputation using these products, having competed against industry stalwarts and start-ups and been ranked as the most innovative global market research company each of the last four years by GreenBook. We believe the company has plenty of growth in its future, which we didn’t have to pay for at the prices at which we acquired our shares.

BFI-5Much of the slower growth during the last few years has been deliberate, as the company moves away from its more traditional “Twist” (System 2) products and toward its “Juicy” (System 1) line of products. In 2011 Twist products were 44% (£9 mm) of the total revenue; and in 2015 these products represented 16% (£4 mm) of total revenue. Total Juicy products have grown at a compounded rate of 19.5% during the last 5 years; and the Juicy quantitative products, which the company believes is the future of the business, have actually grown at a compounded rate of 21% during that period, and now account for 79% of gross profit (up from 50%, 5 years ago). Geographically, the company has been quite successful in growing its business in the United States, which is the largest market research territory in the world. The US is now the largest revenue contributor and has averaged more than 18% revenue growth during the last 5 years.

We also like that the company has shown the ability to experiment with smaller investments that it believes have the potential to turn into large opportunities. As one might expect, not all of these cheap experiments work, but one of the most recent examples of this is the establishment of a new advertising agency called System-1. The model is unique; instead of hiring the advertising creators in-house, the company has built a network of relationships with freelancers that it hires. BrainJuicer solicits several submissions per project, uses its market research tools to test the ads in advance, and then based on those results, submits the winning entry to the client (assuming it hits a minimum quality rating during testing). While it is hard to tell the extent to which this may turn into a new and better way to create advertising, the company is limiting its investment in this project to £300,000 in the first year, a cost which is fairly small in relation to both the opportunity and the company’s cash balance and free cash flow. We also assume no contribution from this effort in our analysis.

We purchased our shares for about 11 times trailing earnings and just more than 9 times trailing earnings net of the company’s cash. Looking forward,we believe we paid about 9 times 2016 earnings and 7.5 times 2016 earnings net of cash. It appears to us that the company can compound earnings at low-teens rates during the next five years. BrainJuicer has significant excess cash, a debt-free balance sheet, and is being run by an owner-operator who we believe not only lives and breathes the company he founded, but is also trying to create a culture that will survive long after he is gone—which we hope is not for a very long time!

This post has been excerpted from the Boyles Asset Management Q1 2016 Letter to Partners.