The fall of the less-than-almighty U.S. dollar has generated an unexpected payoff for some of the biggest blue-chip companies.

At outfits like

IBM

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,

Mattel

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and

Caterpillar

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, overseas sales helped buoy lagging domestic business in the first quarter. But the trend didn't necessarily reflect more demand. Instead, a big percentage of the gains came courtesy of a weakening dollar vs. the euro and yen.

While that may look like a welcome bonus on income statements, the apparent sales momentum gives the impression that business is better than it really is. To get a true read on demand, investors need to compare results in flat currency. Although most big companies provide it, it can be overlooked amid earnings hype.

"I think currency can be misleading both ways" to the upside as well as the downside, says Jeff Van Harte, manager of the

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Transamerica Premier Equity fund. "When the dollar is strong it unnecessarily depresses results, and when it's weak it unnecessarily inflates them."

The dollar has dramatically lost ground over the past year. Between the first quarter of 2002 and 2003, the euro appreciated 22% while the yen gained 11% in value, notes A.G. Edwards.

To be sure, big companies often protect themselves from currency swings by hedging. For example,

Intel

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, which sells more than 70% of its chips outside the U.S., didn't see any notable effects from currency in the past quarter.

But the dollar's slide has given an unexpected boost to other U.S. companies that hedge less aggressively. Revenue from products sold overseas, especially in Europe, have effectively become worth more when translated back to dollars.

"It's part of the reason

companies are doing so much better than expected this quarter," says Chuck Hill, director of research for Thomson Financial/First Call.

Despite the practical benefit in some cases, big currency swings can act as a red flag for investors. Such fluctuations may suggest companies are being less than prudent in their hedging strategies. "If there was a huge cash impact from either losses or gains, you would be a little nervous, you'd kind of wonder, 'Are you trading or really hedging cash flows?'" says Van Harte.

IBM has drawn scrutiny for precisely that reason. With some $81 billion in annual revenue, the tech behemoth draws over half its revenue from overseas.

Though it managed impressive double-digit growth in the first quarter, most of the gains reflect the effect of a weakened U.S. dollar rather than improving sales. Including currency benefits, IBM boosted revenue 11% from year-ago levels to $20.1 billion in continuing operations. But holding currency constant, sales grew a less-impressive 4%.

"If you take the revenues and bottom line and subtract off what we interpret to be the currency gain, where we come up is with a roughly 10% miss on the top line and bottom line," says Richard Williams, a strategist and senior software analyst at Summit Analytic Partners, who has a small short position in the stock. He argues that currency should be stripped out in gauging IBM's performance.

"I don't see why it's appropriate to have foreign currency gains listed in operating income, unless they're acting as a currency trading firm. It's not a part of the hardware and software business," says Williams. "Nobody can say with confidence that currency gains will be recurring. So if they're nonrecurring, they shouldn't be in the operating numbers."

Fund manager Van Harte agrees: "When we look at results as an investor, we would look more for the change in local currency as opposed to the dollar translation, so it's apples to apples."

It's a point worth noting for investors, given the number of U.S. companies with extensive overseas sales operations.

H-P

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pulls in 59% of sales from outside the U.S. and in the most recent quarter,

Dell

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took in 44% of revenue from overseas. Neither has reported their first-quarter results yet.

Outside the technology arena, some of the biggest beneficiaries of the currency swing have been consumer staples companies, which tend to have big European sales.

3M

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, which sells 58% of its goods outside the U.S., said the weak dollar pushed up international sales by just over 10%.

Currency alone drove

Eastman Kodak

(EK)

to revenue growth. The company reported a first-quarter sales rise of 1% including currency; without foreign exchange, sales would have declined 4%. The film maker pulls in a whopping 58% of sales from outside the U.S.

At Mattel, international gross sales were up 13% over last year measured in dollars, helping offset the lousy performance of domestic sales, which slumped 5%. But measured in local currencies, international revenue actually stayed flat.

International revenue accounts for more than one-third of Mattel's revenue, chipping in 36% of sales in 2002.

But currency can also act as a drag. In the case of Caterpillar, currency contributed about one-third of first-quarter sales growth of 9%, but overseas product costs also rose.

All told, the tractor company figured currency swings had a net

negative

impact of around $20 million. Cat draws 48% of sales from outside North America.

It's Money, Not Growth

The bottom line: Revenue gains from currency may be welcome in a period of middling to no growth, but some analysts worry that investors have shrugged off the reason behind the gains, treating them as if they reflect organic business growth.

"Judging from the fact that IBM went up 5 bucks after its report, a lot of investors didn't understand or care that from an operating perspective, the company missed its estimates," says Williams. He thinks that shows how unwilling investors have been to surrender their hopes of an incipient recovery. In the absence of real growth, they've accepted the next-best thing.

But if underlying demand doesn't pick up soon, Williams thinks some of the names that were given the benefit of the doubt on currency-powered sales gains, including IBM, could see some painful downside. "At the end of the first quarter, 95% of the companies we've talked to indicated there's no evidence of a recovery in software. If that's the case, IBM is way overpriced," he says.

Staff writer Troy Wolverton contributed to this report.