"I'm wondering if it's possible to install 10.7 to an external drive?"
Works for me.
IMPORTANT:
Something I discovered is that you MUST have journaling ENABLED with Lion, or the installer won't even "see" the drive and/or partition you are trying to install onto.
Up to this point it has been my standard operating practice to DISable journaling (along with Spotlight) on ALL my drives and partitions. Others may disagree, but I don't like the extraneous "disk activity" that goes on behind the scenes with both of these "features" (at least Disk Utility allows users to turn journaling off if they wish).
So, when I first attempted to install Lion to a spare partition, I couldn't even _find_ the partition in Lion's installer. It just "wasn't there".
I quit the Installer and went to Disk Utility, and re-initialized the target partition, this time with journaling ENABLED. Afterwards, the Lion installer saw it and did its thing.
I'm using a USB2 SATA docking station (with a bare drive) as my hardware platform for testing Lion. Yes, it does boot up a bit slower, but once "up and running", it's just fine.
I can't see why anyone would (at least at this point in the developmental stages) want to use Lion as their "primary system". Already have seen a few postings in the forum with the gist of "how do I downgrade BACK to Snow Leopard?" Well, why did you take such a big chance in the first place?