In a report to clients issued Monday, Kaufman Bros.’ analyst Shaw Wu says it will be out before March, or June at the latest, and he offers three reasons that the refresh of Apple’s best-selling desktop machine is running behind schedule. According to his latest supply chain checks:

1. Apple hasn’t yet decided whether to power the new iMac with Intel quad-core processors or newer dual-core processors with larger caches. “While quad-core would provide a material improvement in performance and potentially  jump start sales,” he writes, “it could cannibalize the Mac Pro, its high-end tower.”
2. Apple computers tend to run hot, and the iMacs vents and cooling systems may need to be redesigned, he says, “to deal with higher heat dissipation.”
3. The timing of Snow Leopard — the next-generation Mac OS X announced by Steve Jobs last June but still without a firm release date — could be an issue. “While Leopard would take advantage of multiple cores,” he writes, “Snow Leopard takes it to the next level with better support for multi-core, multi-processors, and OpenCL, with enhanced graphics capability.”

Wu points out what last week’s earnings report made abundantly clear: Apple’s desktop machines are due for an overhaul. The company’s desktop business was down 25% year-to-year in the quarter that ended in December. Only boffo sales of the MacBook and MacBook Pro — up 34% — saved its Mac numbers from going south last quarter.

Wu is sticking with his Apple (AAPL) price target of $120 a share, which as he points out is 11 times free cash flow earnings for the calendar 2009, by his estimate, but only 7.5X if you exclude Apple’s enviable $28.1 billion cash hoard.